In a departure from historical norms, the correlation between gold prices and gold mining stocks has weakened, prompting investors to scrutinize potential causes such as substantial central bank purchases and production shortfalls in the gold sector.
The SPDR Gold Shares (NYSE:GLD) ETF, tracking gold prices, has experienced a robust 9.82% surge this year, fueled by concerns over inflation, economic growth, and geopolitical instability. However, this upward trajectory is not mirrored in the performance of gold mining shares. The iShares MSCI Global Gold Miners ETF (NYSE:GDX) and the VanEck Gold Miners ETF, which follow gold producers’ shares, have seen comparatively modest gains of 2.28% and 1.7%, respectively.
Presently, the correlation between gold prices and gold miners’ shares stands at 0.6 in 2023, a decline from the historical level of 0.8, according to data from VettaFi spanning a decade. A correlation coefficient of 1 signifies a perfect positive correlation, while zero indicates no connection.
Imaru Casanova, Portfolio Manager for the gold and precious metals investment strategy at VanEck, expressed bewilderment, stating, “Interest in gold just hasn’t been carrying over into interest in the companies that actually produce it.”
One potential factor, according to Casanova, is the substantial gold buying spree by global central banks, exceeding 1,100 tonnes last year, as reported by the World Gold Council. Despite a third-quarter dip in central bank buying, the World Gold Council anticipates 2023 purchases approaching last year’s levels.
On the flip side, production shortfalls have adversely impacted certain gold miners’ financial performance and share prices, notes Roxanna Islam, Associate Director of Research at VettaFi. Islam commented, “Gold prices can only help so much if you can’t produce the gold in the first place.”
Newmont Corp., representing almost 16% of the iShares mining ETF, is expected to fall short of analysts’ projections this year due to a recently settled strike at its Penasquito mine in Mexico.
Other factors, such as heightened spending on exploration and production by gold mining companies, coupled with challenges in sustaining current production levels, are further dampening the production outlook, says George Milling-Stanley, Chief Gold Strategist at State Street (NYSE:STT) Global Advisors.
Even Barrick Gold (NYSE:GOLD), reporting a 3% gain in gold production in the third quarter, indicates that overall output in 2023 will not meet expectations, maintaining a production level approximately half of its 2006 peak of 8.64 million ounces.
The broader market’s dip over recent months, pushing the S&P 500 approximately 5% below its July highs, has also weighed on miners’ shares. Investors, displaying caution towards stocks in general, have caused gold miners to track broader market trends rather than responding to the dynamics of the gold market itself, notes Casanova.
