Which Gold Stock Has
The Best Beta to Gold?
February 4, 2009
Gold stocks are supposed to have more leverage than the
gold price - otherwise why own them? There is a generally accepted,
unwritten rule that gold stocks should move 3:1 with gold - so if gold is
up 1%, gold stocks as a group should be up 3%.
Few people might believe it over the last year, but that ratio has held
relatively well through the 2008 economic downturn, which saw the gold
price get hit hard, and its resulting bounce-back. There is a sense
in the market that gold stocks have not responded to bullion. But
As an example, gold was US$970 in late July, and then moved down to
US$720 during the October panic - 25% downward move. During that
same time, the XAU went from 200 to 68 - 66% move - 2.5x the leverage. (The
XAU is an index traded on the Philadelphia exchange. It consists of 12
precious metal mining companies.)
On the way back up from October to the highs in late January 2009, gold
moved from US$720 - US$920 - a 27.7% increase. The XAU went from 68
- 126 - an 85% move - almost exactly 3x the swing in gold.
But if we dig a little deeper, which gold stocks have moved the most -
which ones has the best beta to gold? The website "Investing
101" says ""Beta" is a number which reflects how
volatile a stock has been relative to the market... A BETA of 1.00 means
that on average, a stock has traditionally matched the markets swings
both on the upside and on the downside. A BETA greater than 1.00 reflects
above average market volatility, and a BETA of less than 1.00 indicates
below average market volatility.
In other words, which stocks (generally) give us the biggest bang for our
buck when gold has a large move?
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