Gold Miners: Taking A Peak Under the Hood

October 07, 2010


GDXJ - Junior Gold Miners

YTDReturn Annual Volatility Downside Semivariance Sharpe Ratio Beta vs. Gold Portfolio Weight
SEMAFO Inc. 131.2% 49.1% 25.5% 2.67 .04 5.3%
Allied Nevada Gold Corp. 84.8 48.5 28.5 1.74 1.86 4.3
Alamos Gold Inc. 33.8 40.4 22.5 .83 .10 3.7
Coeur d'Alene Mines 11.7 49.6 29.8 .23 1.89 3.5
Silver Standard Res. 2.4 39.3 23.3 .06 1.43 3.4
Mean 52.8% 45.4% 25.9% 1.11 1.06


There's a lot more variability in the juniors' performance, which is reflected not only in the spread of returns, but also in their Sharpe ratios and betas. Clearly, China's SEMAFO, Inc. (TOR: SMA) was an outlier. Its beta may bear explanation, though; the number is so low because the stock tends to "zig" when gold "zags." In large part, this is a currency effect, as SEMAFO and Alamos Gold Inc. (TOR: AGI) trade in Canadian dollars.

Notably the junior miners' volatility, as well as their downside semivariance, is uniformly higher than that of the larger producers.

Taking a slice off the top, each miner group leaves us with this: Yes, you'll likely get a better return from juniors in a bull market for gold, but you'll pay for it with higher volatility and downside risk.

The question you have to ask yourself is whether you're nimble enough to lift your portfolio exposure to these high-speed stocks before they can have a deleterious effect.


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