How do gold futures and gold miner stocks interact? In their January 2016 paper entitled “Are Gold Bugs Coherent?”, Brian Lucey and Fergal O’Connor examine the relationship between gold miner stock behavior (NYSE ARCA Gold Bugs Index) and the price of gold (COMEX gold futures). Specifically, they apply wavelet transforms to analyze the degree of co-movement (coherency) and lead-lag tendencies between changes in the Gold Bugs Index and gold futures price measured at both short and long intervals. Using daily closes for the two series during January 1998 through most of November 2015 (see the chart below), they find that:
- Gold futures and gold miner stocks move broadly together.
- Changes in gold futures mostly lead gold miner stock returns by at least a week. The leading relationship is more reliable for measurement intervals of a year or more.
- In other words, factors other than gold future prices dominate gold miner stock returns over very short intervals.
- Gold miner stocks are therefore likely less effective as a safe haven during financial market crises than gold or gold futures.
The following chart, taken from the paper, tracks daily NYSE ARCA Gold Bugs Index levels and COMEX 100-ounce gold futures contract closes over the sample period. The chart shows that the two series generally move together over the long term.
In summary, evidence suggests that a lag in reflecting gold futures price makes gold miner stocks a less effective safe haven than gold futures.
Cautions regarding findings include:
- The paper does not test findings explicitly via allocation/trading strategies.
- Gold futures price behavior may differ from that of spot gold.
See also the more practical “GDX vs. GLD” and “Simple Gold-Gold Stock Fund Pair Trading”.
