gold price/equity price correlation

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    The Correlation Between a Commodity Price and an Equity Price

    Some ‘single-product’ companies show a strong correlation between their share price and a particular commodity (or other) price. For example; many gold producers and the gold price; MIM and the copper price; and CTX and Singapore refiner margins.

    Applying fairly complex maths to these relationships can often identify buy points for a particular stock- when the share price trend has moved significantly below the commodity price trend. I have had a fair bit of success using this technique to buy low. Knowing when to sell is another matter!

    In a perfect market, the price of a company such as NCM would trend with the gold price. They are essentially a single-commodity producer. This assumes, constant costs, no geopolitical events, no takeovers, no hedging, no shutdowns, no exploration etc.

    With all those factors a market reality, NCM still normally has a very high correlation to the gold price. However, there are times when that nexus is broken. Now, in my opinion, is one of those times. My calculations suggest that NCM should now be about $8.16, not today’s close of $6.52. If this was correct, there is a gap of $1.64 or 25%. Very precise numbers, I know, but the general message is clear. Of course the gap can close both ways. That is, the stock goes up or gold comes down (or both).

    Incidentally, applying the same dodgy principals to LHG suggests to me that LHG is only slightly underpriced. That is, the correlation is pretty high (close) right now.

    Don’t ask me why this is happening. I’ve read the theories. For me, it’s simply a strong buy signal for NCM (but not LHG), and there are others that look like good buys.
 
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