Gold Equities Will Lose Leverage to Bullion Prices

The leverage of gold equity prices to changes in bullion prices has been unusually strong so far in 2016. The chart shows the response of monthly movements in the Philadelphia Gold and Silver stock index to movements in gold bullion prices over the past 20 years. The blue markers reflect the data to the end of 2015. The red markers illustrate the experience over the first seven months of 2016. Prior to 2016, a 5% increase in the gold price generated an average rise in equity prices of 7.5%. The leverage in weakening markets was stronger. A 5% bullion price decline was associated with a 9.1% fall in equity prices. The difference has meant an aggregate 257 percentage point gap in favour of gold bullion. Over the most recent seven month period, a 5% increase in bullion prices has implied an average 19.4% equity price response. The difference between the 2016 response and the responses in earlier years implies a possible halving or more in the equity response rate to a bullion price rise as the gold price cycle proceeds.