Differences in hedging strategies most likely play a role in how changes in the price of gold explain returns on Goldcorp, Barrick, Newmont and Agnico Eagles. I have chosen 2 specific years for my analysis: Beta estimates of these gold stocks that decided either to not hedge gold sales or to occasionally enter into derivative transactions or use contracts which were classified as non-hedge derivatives.
Newmont Mining does not hedge gold prices. This article investigates whether in the past gold hedging strategies usage may have reduced the equity return variability of four gold mining stocks: In gold price increased I chose the year in which the gold price had its higher uptrend, that is from December 29, - December 31, The price of gold increased with Rf, risk free rates, at daily frequency, are downloaded from the Dartmoth Library: The Tbill return is the simple daily rate that, over the number of trading days, in the month, compounds to 1-month TBill rate from Ibbotson and Associates Inc.
Louis economic research website. The table below shows that the annualized means are: Gold delivered higher returns than the stock market, during Instead the difference between the two standard deviations 0. Now I will use a two factors model to calculate the gold beta: The following four pictures show summary reports of the gold mining stocks during the observed period, observations daily prices:. Gold and market exposure for Goldcorp Inc.
Gold exposure for Agnico Eagle Mines Ltd is not statistically significant during the December 29, - December 31, period. I chose the year, see the graphic above , in which the gold price had its worse downtrend during its falling phase, from October to December Multiple R and R Squares are low but F see summary output pictures for each gold stock above is less than 0.
Finally I run a scatter plot of the residuals for each regression model. Each model is on average correct for all fitted values. The residuals seem to fall in a symmetrical pattern and have a constant spread throughout the range, see the pictures below:. This may be explained because the gold mining stocks decided either to not hedge gold sales or to occasionally enter into derivative transactions or use contracts which were classified as non-hedge derivatives.
Barrick used gold contracts which were classified as "non-hedge derivatives. The company used them in order to achieve its risk management objectives; however they did not meet the strict FAS hedge effectiveness criteria.
Their change in the fair value was recorded in earnings in a manner consistent with the derivative positions' intended use, but the non-applicability of hedge accounting could lead to significant volatility in corporate earnings And its financial statements say, all of its "future gold production was unhedged in order to provide its shareholders with full exposure to changes in the market gold price.
Newmont has historically entered into derivative contracts to protect the selling price for certain anticipated gold production and to manage risks associated with gold, but the company generally avoided gold hedging and its strategy was to provide shareholders with leverage to gold prices by selling its gold at spot market prices see Note 14 to the Consolidated Financial Statements, Newmont Annual Report for , and Newmont Annual Report , note 17 derivative instruments.
In the past Agnico Eagles Mine Ltd. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha.
I have no business relationship with any company whose stock is mentioned in this article. Summary Differences in hedging strategies most likely play a role in how changes in the price of gold explain returns on Goldcorp, Barrick, Newmont and Agnico Eagles.
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