Discovering The Factors Affecting US Gold Mining Stocks' Returns

Since the abolishment of the gold standard in 1971,the development of the gold investment market has been very mature.Especially under current complex geopolitical and fast changing economic circumstances,gold investment is widely favored for its significant intrinsic value and risk-hedging features by both institutions and individuals.In addition to spot gold,investors have the financial freedom to choose from a variety of gold businesses in different markets such as gold futures,stocks,ETFs,etc.Gold and stocks are two important investment tools in global financial market.Gold mining stocks combine the features of both gold and stocks,thus the study of factors affecting gold mining stock returns can shed light on the influence of spot gold returns and specific firm-level factors on sensitivity of gold mining stock returns,so as to provide investors with diversified investment strategies.Lots of research has been done on gold and stocks,mostly focusing on factors impacting the price of gold,stock valuation,the correlation between the price of gold stocks and gold.Based on these researches,this paper found that in addition to the excess return on gold mining stocks over gold returns,the returns on gold mining stocks often outperform the overall stock market index,such as the S&P500.Gold stock returns are associated with characteristics of gold mining companies,but little research is done on decomposing the factors associated with company fundamentals.Given such background,this paper defines the returns on stock as the change rate of ex-rights stock price and intends to study the factors affecting returns on gold mining stocks by both theoretical and empirical study.The variables used in this thesis are based on previous studies and Barra US Equity Model and these variables are spot gold returns,stock liquidity and company fundamentals such as leverage,dividend yield,percentage of insider shareholders,gold production cost and gold reserve ratio,etc.Studies on the relationship between gold mining stock returns,spot gold returns and some company related factors can provide investors with gold investment suggestions.In the theoretical section,this thesis lists possible influencing factors of gold mining stock returns and suggests a possible hypothesis according to theories and previous studies.In the empirical section,this thesis constructs multiple regression models that use the panel data of US gold mining stocks with the time period from the fourth quarter of 2012 to the third quarter of 2017 after correlation test and unit-root test.The multiple regression analysis models incorporate interaction terms which are returns on gold multiply by company fundamentals.The regression results show that gold mining stocks' returns are highly correlated with returns on spot gold and the coefficient is around 3,which means gold stocks outperform gold at a factor of three.Secondly,besides spot gold returns,overall stock market returns and higher liquidity will increase the returns on gold mining stocks.In addition,from the firm-level indexes,higher production cost will decrease the stock returns while higher leverage will increase the stock returns.What is more,higher leverage,dividend yield and higher percentage of insider shareholders can increase the influence of the price movement of gold on gold mining stocks returns.Finally,this paper tests the effect of variables lagged by a quarter on gold mining stocks'returns and found that the lagged production cost has significant negative effect on explaining stocks'returns in the current period and lagged reserve ratio has positive effect.In addition,percentage of insider shareholders and reserve ratio lagged by one period will increase the effect of increased price of gold on returns on gold mining stocks.It also reveals that we can predict the stock's returns in the future using current production cost,reserve ratio and percentage of insider shareholders.Based on above study,the last chapter provides investors and institutions with suggestions for stock selection.The thesis also points out that the results can be used by active fund managers to improve the performance of portfolios and active management can have excess returns compared with passive management.It also gives suggestions to gold mining companies to adjust their corporate governance and capital structure.