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Gold price leverage

Summary/Abstract: Apart from investments in physical gold, investors can invest their capital in stocks of gold-mining companies. The goal of the paper is to assess the relationships between changes in gold price and prices of stocks of mining companies, and to identify and measure the so-called gold price leverage effect. Compared with investments in physical gold, stocks of these companies offer the investors opportunities to achieve a higher rate of return but also expose them to considerable risk. In other words, in the case of investment in mining shares a positive or negative leverage effect may occur respectively, its size depending inter alia on the position of mines in the process of seeking and mining gold: explorers, beginners and senior producers (juniors and seniors). When assessing this effect, basic descriptive statistics, graphic charts and descriptive analysis were used. Empirical analysis demonstrates that there is a strong impact of changes in gold prices on the rates of return on investments in gold-mining stocks. In the analyzed period of 1997-2014 (18 years), the leverage effect, calculated on an annual basis, occurred in eleven cases, while no such a phenomenon was observed in seven cases.

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