Empirical correlation of mineral commodity prices with exchange-traded mining stock prices

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1 text:templte Joul 8/8/11 11:50 Pge 459 Syopsis Empiicl coeltio of miel commodity pices with exchge-tded miig stock pices by C. Ngolo* d C. Musigwii* Miel commodity pices compise oe of the key citei i the selectio of miig stocks. We coted tht of the thee picipl elemets of miel commodity pices, spot pice, fowd pice d log-tem pice, oe hs gete impct o the she vlutio pocesses used by ivestos. This esech ppe exmies the extet to which ech of these elemets iflueces the vlutio pocess. The itetio is to povide ivestos i miig stocks with gete udestdig of how fluctutios of commodity pices ove time ffect the pices of the miig stocks they hold, o ited to sell o buy. Thee miel commodities, gold, silve, d coppe, wee used s cse studies, sice mket dt o these commodities is edily vilble i the public domi. Nie mket idices coveig ll thee miel commodities wee selected. These e bsed o clely defied citei with the itetio of elimitig mbiguity d to test fo coeltio with the thee sets of miel commodity pices. Nie miig compies, which wee ot the pimy dives of the elevt idices employed i the study, wee used to vlidte the esults obtied fom the idices i ode to void duplictio of the sme coeltio duig coss-checkig. Ech commodity pice ws djusted fo opetig costs. Fo ech mket idex, vege opetig cost ws clculted fom the compies compisig its bsket, while ech compy s ul opetig costs wee used fo the stocks of the idividul compies exmied. The dt ws collected fo the peiod Juy 2004 to Octobe This peiod ws futhe split up ito thee sub-peiods to ccout fo the Globl Ficil Cisis (GFC) peiod tht stted i mid We coclude tht miig stock pices e coelted with miel commodity pices, but with spot d fowd pices exhibitig stoge coeltios th log-tem pice. This fidig should be useful fo evlutio puposes. Whee csh flow methodologies such s discouted csh flow o eigs pe she e used to vlue odiy shes d commodity pices e equied to estimte futue csh flows, the fidigs suggest tht spot pices should be used s opposed to log-tem pices. The wok epoted i this ppe is pt of cuet MSc esech study t the Uivesity of the Witwtesd. Itoductio Duig peiods of ecoomic gowth, ivestmet i miig stocks escltes cocomitt with buoycy i the commodities mkets. The mket teds to plce pemium o shes while miel commodity pices e high1. Commodity pices e obviously key citei fo ivestmet decisios with espect to miig compies. Commodity pices e vilble i thee foms: mely, spot pices, fowd pices, d log-tem pices. It is sumised tht the public s ivestmet o divestmet decisios e iflueced moe by spot pices th they e by fowd d logtem pices. While the eltioship betwee commodity pices d stock mket coutes is the bed d butte of stock mket lysts who do this o dily bsis, s f s the uthos e we this hs ot bee compehesively d qutittively tested i cdemic sese. This esech study ws theefoe udetke to test this hypothesis d detemie the extet to which ivestos my pply spot pices whe vluig stocks of miig compies. Fo exmple, Figue 1 illusttes the time-ted eltioship betwee the spot gold pice d the Amex Gold BUGS Idex, while Figue 2 illusttes the time-ted eltioship betwee the spot gold pice d the stock. The gphs idicte qutittive eltioship betwee spot gold pice d the mket idices which suppots the udelyig hypothesis of this ppe. Fowd d log-tem pices wee used to vlidte the extet to which the hypothesis could be tue. The she pice of miig T s c t i o P p e Keywods Miel commodity, pice, spot pice, fowd pice, log-tem pice, mket cpitliztio, Globl Ficil Cisis, miig stock, pice, mket idex. * School of Miig Egieeig, Uivesity of Witwtesd, Johesbug, South Afic. The Southe Afic Istitute of Miig d Metllugy, SA ISSN X/ Ppe eceived Jul The Joul of The Southe Afic Istitute of Miig d Metllugy VOLUME 111 JULY

2 text:templte Joul 8/8/11 11:50 Pge 460 Empiicl coeltio of miel commodity pices Figue 1 A time-ted plot of spot gold pice d the Amex Gold BUGS Idex fo the peiod Figue 2 A time-ted plot of spot gold pice d the Bick Gold she pice fo the peiod compy is impott i tht it diectly detemies the vlue of the mket cpitliztio of the miig compy, hece its et woth to ivestos. Actul dt fo thee commodities, mely gold, silve, d coppe, wee used fo testig the hypothesis. These thee commodities wee selected becuse thei stock mket dt is edily vilble i the public domi. Spot pices of commodities ted to fluctute ove time, followig ppetly cyclicl ptte s show i Figue 3. Howeve, Robets2 hs gued tht while these fluctutios e loosely efeed to s cycles, they e ot cycles i the stict defiitio.thee e my othe iflueces o the peceived cyclicl behviou of commodity pices ove time d pticully though boom d bust peiods. The followig obsevtios hve bee oted fom diffeet studies: Commodity pices ted to fluctute widely i the shot tem3 They usully move togethe4 Peiods of low pices will be iteupted by shp peks5 Pice cycles ted to be dispopotiote, with shote pice booms d pologed pice slumps, d the time it tkes to ecove o fll fom slump o boom is idepedet of the dutio of the slump o boom itself6. The geel ule i ivestig is to buy stock tht is udevlued (she pice is lowe th itisic vlue pe she) d sell stock tht is ovevlued (she pice is highe th itisic vlue pe she). I ll the methods of stock vlutios used, the ole of futue eigs is pomiet. Futue sheholde eigs e diect fuctio of csh flows, which i tu e pemised o physicl metl sles which, togethe with thei espective commodity pices t the ticipted time of the sle, detemie the eveues tht e used i poducig the csh flows. Movemet i commodity pices will detemie futue csh flows, d udestdig the tue of this eltioship is essetil to meigful stock mket vlutios. The wok epoted i this ppe o detemiig the tue of this eltioship foms pt of cuet MSc esech study t the Uivesity of the Witwtesd. Figue 3 Defiitios d omecltue of pice cycles JULY 2011 VOLUME 111 The Joul of The Southe Afic Istitute of Miig d Metllugy

3 text:templte Joul 8/8/11 11:50 Pge 461 Empiicl coeltio of miel commodity pices Resech methodology The study ws stuctued such tht the dt (spot commodity pices, fowd pices, d log-tem cosesus pice estimtes) would be tested gist miig idices d the coss-checked by testig the sme dt gist specific miig stocks. The miig stocks chose wee ot the pimy dives of the idices, i ode to void duplictio of the sme coeltio duig coss-checkig. The decisio to use mket idices the th stocks of idividul miig compies s the mi dt set fo testig the hypothesis ws bsed o the ssumptio tht the vlue of stocks of idividul miig compies could specificlly be iflueced by fctos othe th the commodity pice. These fctos iclude: The clibe of the compy s mgemet The Geo-politicl loctio of its opetios Its busiess sttegy The compy s divided policies. The oly detemit of mket idex movemets is the movemets i the she pices of its costituet bsket of stocks, which do ot ecessily tke ito ccout the fctos goveig the stocks of idividul compies tht e ot icluded i tht bsket. Iitilly, the ide ws to use both mket idices (which compise bsket of stocks) d mutul fuds (which ctully ow miig stocks). Howeve, the use of mutul fuds ws uled out becuse mutul fuds iclude othe fctos such s fud mges fees, the skill d competece of the fud mges who pick the stocks, d tdig methodologies. The mket idices used wee coppe idices, compisig stocks of miig compies ivolved i coppe poductio; gold idices, compisig stocks of miig compies ivolved i gold poductio; d silve idices, compisig stocks of miig compies ivolved i silve poductio. Poductio i this cotext is defied s the ctul miig pocess d/o explotio fo tht specific miel commodity. Idices bsed upo metl holdigs the th miig compies wee omitted sice the vlue of thei shes my be iflueced by fctos othe th commodity pices. Bsed o the bove citei, ie mket idices wee selected to cove ech of the thee miel commodities s illustted i Tble I. I decidig upo the peiod to be tested it ws ecessy tht it be sufficietly log to cptue peiods of both buoyt d ecessioy teds (boom d bust) especilly fo gold d silve. The histoicl dt used hee clely demosttes the degee of mket sesitivity to ecoomic coditios. The peiod 2004 to 2010 ws dopted fo the lysis, d ws futhe split up ito sub-peiods to llow the diffeetil lysis of dt though the boom d bust peiods, d to isolte the Globl Ficil Cisis (GFC) peiod. Dt fom the GFC peiod would obviously be icosistet with the est of the dt becuse mkets wee tdig o distoted, d pobbly uelisticlly low, vlues of udelyig ssets. The sub-peiods wee detemied fom the coppe histoicl pice chts, sice the effects of the GFC wee most poouced i bse metls. The thee sub-peiods wee theefoe selected s follows: Peiod 1 Pe-GFC peiod (Juy 2004 to July 2008) Peiod 2 GFC peiod (August 2008 to Mch 2009) Peiod 3 Post-GFC peiod (Apil 2009 to Octobe 2010). Nie compies wee selected fo lysis (Tble II). The selectio citei wee stuctued to ule out y mbiguity i the selectio pocess. The compies wee selected ccodig to the followig citei: Thee should be o mjo chges i oe eseves, ssets, d (to lesse extet) poductio levels fo the peiod to be tested I ode to clssify compy s oe poducig specific commodity, otig tht gold, coppe, d silve ted to be poduced with othe by-poducts, it ws ecessy coditio tht the eveue potio deived fom the sle of the specific commodity hd to exceed the eveue deived fom the sle of y oe of the othe by-poducts, teted idividully. Eve though thee ws o miimum eveues potio set, compies with gold eveue gete th 80% of totl eveue d compies with coppe eveue gete th 60% of totl eveue wee selected i ode to hve mgeble dt set The selected compies should hve bee i opetio ove the etie peiod beig tested Lstly, the selected compies should belog to o moe th oe of the selected idices. The followig souces of ifomtio wee used i obtiig dt eeded to coduct the esech study: Commodity pices ll thee sets of commodity pices (coppe, gold, d silve) wee obtied fom the I-NET BRIDGE dtbse Fowd pices gold d silve fowd pices wee deived fom clcultio, utilizig the fowd te d spot pices fo the sme peiod. Fowd tes fo both gold d silve wee obtied fom the Lodo Bullio Mket Associtio (LBMA) website. Fo coppe, spot pices d fowd pices wee obtied fom the Yhoo! Fice website Tble I The ie mket idices selected fo the thee commodities Commodity Mket idex Coppe ISE Globl Coppe Idex Solctive Globl Coppe Idex Gold FTSE Gold Mies Idex/JSE Gold Idex NYSE Ac Gold Mies Idex Solctive Globl Gold Miig Totl Retu Idex Amex Gold BUGS Idex S&P/TSX Globl Gold Idex Silve TheUpTed.com Cdi Silve Mies Idex Solctive Globl Silve Mies Idex T s c t i o P p e The Joul of The Southe Afic Istitute of Miig d Metllugy VOLUME 111 JULY

4 text:templte Joul 8/8/11 11:50 Pge 462 Empiicl coeltio of miel commodity pices Tble II The cotibutio of coe poduct to totl eveue of ech compy Totl eveue deived fom the mi poduct pe compy (%) Gold Compies Avege Bick Gold 99% 98% 78% 83% 87% 77% 87% Gold Fields 94% 94% 94% 94% 94% 93% 94% Rdgold Resouces 88% 98% 97% 100% 99% 98% 96% Richmot Mies Ic 93% 92% 85% 91% 94% 92% 91% Dub Roodepoot Deep Ltd 100% 100% 100% 100% 100% 100% 100% Silve Compies Avege Silvecop Metls Ic % 41% 51% 51% 47% Hochschild Miig - 43% 56% 59% 61% 65% 57% Coppe Compies Avege Avil Miig Ltd 100% 72% 87% 88% 91% 100% 90% Plbo Miig Compy 77% 78% 65% 63% 51% 64% 66% Log-tem pices ll thee commodity pices wee obtied fom vege of cosesus foecsts by goup of bks, mkig use of the 27 moths veges, i lie with fowd pices clculted t 27 moths veges Mket idex pices ll mket idex pices wee obtied fom the Bloombeg temil dtbse Compy stock pices the mi souce of stock pices ws the Yhoo! Fice website, except fo Dub Roodepot Deep (DRD) d Plbo Miig Compy. Fo these two compies, this dt ws souced fom the I-NET BRIDGE dtbse Compy opetig costs compies vege ul opetig costs pe ouce (gold d silve) d pe to (coppe) wee obtied fom the espective compy ul epots Exchge tes ll exchge tes wee souced fom the I-NET BRIDGE dtbse. These wee used to covet ll pices used i the lysis to commo cuecy to eble the compiso of diffeet dt Othe dt othe dt used i selectig stocks of idividul compies such s eveue, ssets, d poductio tes ws souced fom compy ul epots. As some of the dt equied fo testig the hypothesis could ot be souced i the fomt suitble fo lysis, these wee tsfomed ito the equied fomt by the uthos. These wee: fowd pices fo gold d silve, opetig costdjusted mket idices, d opetig cost-djusted spot pices fo ech compy. Stock pices wee detemied o the bsis of futue eigs bsed o the commodity pice pe uit of poduct less the uit opetig cost d motized cpitl cost pe uit. Totl ul opetig costs obtied fom ul epots of the compies wee veged ove 12 moths fo ech ye, d the esult ws used s the vege mothly opetig cost fo ech pticul ye d the deducted fom the mothly commodity pice i tht pticul ye. Fo the costuctio of the opetig cost djusted mket idices, the vege opetig costs of the idex s top te compies ws utilized s the vege ul opetig cost fo tht pticul idex d coveted to mothly bsis. The logic employed ws tht the mkets would discout pojected opetig supluses. Fo exmple, gold miig compy with opetig costs of US$700/oz t te of poductio of oz/um would ttct estimted supluses of: US$500 millio/um t pojected US$1 200/oz gold pice US$600 millio/um t pojectedus$1 300/oz gold pice US$700 millio/um t pojectedus$1 400/oz gold pice. The bove c be comped with simil gold miig compy poducig oz/um but t highe opetig costs(us$1 000/oz)to obti the followig suplus estimtes: US$200 millio/um t pojectedus$1 200/oz gold pice US$300 millio/um t pojectedus$1 300/oz gold pice US$400 millio/um t pojectedus$1 400/oz gold pice. Thus, whe coeltig mket vlutios with commodity pices (fo exmple spot o fowd pices) it is impott to deduct opetig costs fom eveues befoe doig the coeltios becuse ivestos would discout expected csh mgis, ot ticipted eveues. Two 462 JULY 2011 VOLUME 111 The Joul of The Southe Afic Istitute of Miig d Metllugy

5 text:templte Joul 8/8/11 11:50 Pge 463 Empiicl coeltio of miel commodity pices Tble III Clcultio of 2009 opetig costs pplicble to the ISE Globl Coppe Idex Compies Opetig costs (US$/t) Weightig Opetig costs cotibutio (US$/t) (Opetig costs* weightig) Southe Coppe Cop % Feepot McMoR Coppe d Gold % Atofgst Holdigs Plc % Rio Tito Plc ADR % Xstt Plc % Kzkhmys Plc % Fist Qutum Miels Ltd % Ivhoe Mies Ltd - 4.7% 0.00 KGHM Polsk Miedz SA B % Avil Miig Ltd % Totl 52% T s c t i o exmples of how the vege opetig costs fo idices wee clculted d how the opetig costs wee used i djustig the commodity pices fo ech idex used i the lysis e illustted i Exmples 1 d 2, while Exmple 3 illusttes the clcultio pocess used fo fowd pice. Exmple 1 To clculte the vege opetig costs fo the ISE Globl Coppe Idex i 2009, the opetig costs of compies tht cotibuted 4% o moe to the idex wee tke, weighted ccodig to thei cotibutio to the idex, d summed to give the opetig costs fo tht idex i 2009 s show i Tble III. The fist colum (Compies) i the tble shows compies with weightig (i pecetge) cotibutio of t lest 4% to the idex. The secod colum (Opetig costs i US$/t) idictes opetig costs fo ech compy s quoted fom the espective 2009 ul epots. The thid colum (Weightig) epesets the cotibutio tht ech compy mkes to the idex. The opetig cost is the multiplied with the weightig to give the cotibutio of the compy to the idex s opetig cost s idicted i the lst colum (Opetig costs cotibutio i US$/t). The totl opetig cost is theefoe the sum of the stocks of idividul miig compies opetig cost cotibutios, which i this exmple woks out to be US$ /t (Tble III). Exmple 2 To djust the commodity pice of coppe fo the ISE Globl Coppe Idex i 2009, the pice of the sme peiod is used. Howeve, the opetig cost show i Tble III is the ul cost d ot mothly cost; it is ssumed tht ll the 12 moths i 2009 hd o vege the sme opetig costs tht c be used to djust the mothly commodity pices i the sme ye. I Juy 2009, the spot coppe pice ws US$3106/t. The vege opetig cost fo the ISE Globl Coppe Idex ws clculted to be US$ /t (Tble III). The djusted spot coppe pice fo ISE Globl Coppe Idex is theefoe: Csh mgi pe to of metl=(spot coppe pice/t Avege opetig cost/t) =US$ ( )/t = US$ /t of metl poduced. The opetig cost-djusted spot commodity pice used i the coeltio lysis of the ISE Globl Coppe Idex i Juy 2009 is US$ /t. Usig gold s exmple, Tble IV illusttes the weightig of ech compy mkig up the Amex Gold BUGS Idex, while Tble V shows the top te compies i the Amex Gold BUGS Idex d the summy weighted vege cost fo the idex bsed o the te compies fo the peiod Exmple 3 The fowd pices fo gold d silve wee clculted fom the spot pice usig the followig fomule, whee GOFO is the Gold Fowd Offeed Rtes d SIFO is the Silve Fowd Offeed Rtes7,8: Tble IV Gold fowd pice = gold spot pice*{(1+gofo)^2.25}, whee GOFO is the gold fowd te d 2.25 epesets 27-moths GOFO tes, clculted by dividig 27 moths by 12 moths to covet it to ul tems Silve fowd pice = silve spot pice*{(1+sifo) ^2.25}, whee SIFO is the silve fowd te d 2.25 is clculted s show bove i the gold fowd pice fomul. Compositios of Amex Gold BUGS Idex showig idividul compy weightig Amex Gold BUGS Idex Weightig 1. Bick Gold 14.76% 2. Goldcop Ic 14.49% 3. Newmot Miig 8.72% 4. Comp de Mis Buevetu ADS 6.03% 5. Hecl Miig 5.87% 6. Coeu d Alee Mies 5.46% 7. Gold Fields Ltd ADR 5.31% 8. Agico Egle Mies 4.88% 9. Kioss Gold 4.84% 10. Ym Gold 4.69% 11. Hmoy Gold Miig ADR 4.53% 12. Rdgold Resouces ADS 4.52% 13. Eldodo Gold Cop 4.13% 14. AgloGold Ashti Lts ADS 4.11% 15. Imgold Cop 4.01% P p e The Joul of The Southe Afic Istitute of Miig d Metllugy VOLUME 111 JULY

6 text:templte Joul 8/8/11 11:50 Pge 464 Empiicl coeltio of miel commodity pices Tble V Weighted vege opetig costs fo the Amex Gold BUGS Idex fo Amex Gold BUGS Idex 1. Bick Gold Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Goldcop Ic Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Newmot Miig Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Comp de Mis Buevetue Ads Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Hecl Miig Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Oceu d lee Mies Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Gold Fields Ltd Ad Exchge te (R:US$) Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe she US$ Agico Egle Mies Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe O z US$ Kioss Gold Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe O z US$ Ym Gold Opetig costs (millio) US$ Exchge te (R: US$) Poductio O z (000) OC pe O z US$ JULY 2011 VOLUME 111 The Joul of The Southe Afic Istitute of Miig d Metllugy

7 text:templte Joul 8/8/11 11:50 Pge 465 Empiicl coeltio of miel commodity pices Gold Fowd Offeed Rtes (GOFO) d Silve Fowd Offeed Rtes (SIFO) e the tes t which mket cotibutos (mde up of membes of the Lodo Bullio Mket Associtio) e peped to led gold d silve o swp gist the US doll, espectively. Quotes e mde fo 1, 3, 6, d 12-moth peiods. Both GOFO d SIFO e detemied o dily bsis by cosotium of bks, bsed o dily tsctios cocluded o gold d silve fowd pices. Both tes e clculted fom the Lodo Itebk Offeed Rte (LIBOR) d the gold lese te d silve lese te, espectively. Rtes e quoted o dily bsis. The fomule used to clculte GOFO/SIFO e: GOFO = LIBOR gold lese te SIFO = LIBOR silve lese te. Howeve, fo the pupose of this study, mothly veges wee equied tht could be used i the clcultio of mothly fowd pices. These wee clculted by usig ul (12-moth ollig) figues the covetig these figues to thei 27-moth equivlets i ode to miti cosistecy with the coppe dt. The sme methodology ws used i clcultig SIFO mothly veges. A exmple of how the 12-moth vege dt ws coveted to 27-moth equivlece is show below usig Juy 2004: Gold spot pice = US$401.7/oz Mothly vege GOFO = 1.07 The 27-moth equivlet fowd pice is theefoe clculted s follows: Fowd pice = spot pice *(1+GOFO/100)^2.25 = US$401.7*(1+1.07/100)^2.25 = US$411.45/oz The fcto of 2.25 is obtied by dividig 27 moths by 12 moths. Dt lysis The Peso coeltio sttisticl techique ws used becuse it ws impott to defie d descibe the stegth of possible eltioship betwee commodity pices d miel stock pices. The techique ebles oe to qutify the diectio d mgitude of coeltio. A ecessy ssumptio fo pplyig the Peso coeltio lysis is tht eltioships betwee vibles e lie. All pices wee coveted to commo cuecy, which is the US doll, to be ble to mke fi compiso. Sttisticl evlutios wee coducted usig MS Excel d sttisticl pckge clled SPSS (Sttisticl Pckge fo Socil Sciece). The eso fo usig two diffeet tools ws to vlidte the output by compig the outcome of both pckges. The SPSS pckge ws used becuse it is edily vilble t the Uivesity of the Witwtesd d c hdle lge dt sets. Thee ws optio to ebse dt to 100 usig the fist moth of whe dt is collected s the bse. Howeve, usig ebsed dt poduced distoted esults d decisio ws theefoe mde to use ctul dt. Dt obtied fom ech souce is mothly vege tht ws ssumed to be ed of moth figue. Howeve, some of the dt did ot hve the sme moth ed s othes, d i these cses the lst dy of ech moth fo the peiod ude eview ws ssumed to be the pplicble moth ed. Fo opetig costs of compies tht epot thei fices i diffeet cuecy to the US doll d did ot quote the vege exchge te i thei epots, the exchge tes used i the covesio of thei opetig costs ito US doll ws ssumed to coicide with the dte of thei ul epotig, i ode to miti cosistecy i the lysis. Fo exmple, if compy s ed of ye is 30 Jue, the exchge te used to covet its costs ito US doll is the exchge te quoted fo 30 Jue of tht ye. Results d vlidtio The coeltio coefficiet,, is the sigle umbe tht explis the eltioship betwee two vibles. Howeve, s obseved i this study, the coeltio coefficiet ws foud to be idequte fo mkig coclusive decisio o whethe the eltioship foud betwee vibles ws el the th oe of chce. Afte the coeltio esults wee obtied, sigificce test ws coducted by testig mutully exclusive hypotheses idicted i Tble VI below. The test set the ull hypothesis (H 0 ) which sttes tht the tue coeltio coefficiet is equl to zeo gist the ltetive hypothesis (H 1 ) tht this tue coeltio is ot equl to zeo, bsed o the vlue of the smple coeltio coefficiet. The P-vlue is the obseved sigificce level of the test. If the P-vlue is less th the chose sigificce level (lph vlue, α), the the ull hypothesis is ejected i fvou of the ltetive hypothesis. Othewise, thee is ot eough evidece to eject the ull hypothesis. A exmple to highlight this pheomeo is give s follows: if the P-vlue <0.01, the ull hypothesis is ejected d the ltetive hypothesis is ccepted t 99% cofidece level, sice α is set t Wht this mes the is tht is ot equl to zeo but the less th o gete th zeo. If the P-vlue >0.01, the thee is ot eough evidece to eject the ull hypothesis d the ull hypothesis is ccepted. Results obtied fom MS Excel d SPSS wee i most cses the sme d those tht vied wee oly mee 1% diffeet. They both depicted the sme ted i tems of how ech set of pices coelted with eithe the mket idices o stocks of idividul miig compies. The coeltio of ech set of pices with ech idex o compy fo ll thee commodities vied with the peiod ude cosidetio s idicted i Tble VII. Ovell, spot d fowd pices ted to exhibit lmost equl coeltio with the idices d with idividul miig compies fo gold d silve. This could be ttibuted to the me i which fowd pice is clculted fo gold d silve, while fo coppe it ws diectly quoted fom mket estimtes of fowd pices. Tble VI Mutully exclusive hypotheses tht wee tested Hypothesis Coditio Null hypothesis (H 0 ) = 0 Altetive hypothesis (H 1 ) <>0 T s c t i o P p e The Joul of The Southe Afic Istitute of Miig d Metllugy VOLUME 111 JULY

8 text:templte Joul 8/8/11 11:50 Pge 466 Empiicl coeltio of miel commodity pices Tble VII Summy of vege coeltio coefficiets ove the fou peiods Peiod 1 Peiod 2 Peiod 3 Peiod-Etie Avege Spot Fowd Log-tem Spot Fowd Log-tem Spot Fowd Log-tem Spot Fowd Log-tem Spot Fowd Log-tem Gold Idices FTSE Gold Mies Idex / NYSE Ac Gold / Mies Idex Solctive Globl Gold Miig / Totl Retu Idex Amex Gold BUGS Idex / S&P/TSX Globl Gold Idex / Gold Compies Bick Gold / Gold Fields / Rdgold esouces / Richmot Mies Ic / Dub Roodepoot / Deep Ltd Silve Idices TheUPTed.com Cdi / / / / / / Silve Mies Idex Solctive Globl Silve / Mies Idex Silve Compies Silvecop Metls / Hochschild Miig / Coppe Idices ISE Globl Coppe Idex / Solctive Globl / Coppe Idex Coppe Compies Avil Miig Limited / Plbo Miig / Peiod 3 yielded highe umbe of ull hypotheses th y othe peiod ude eview, givig totl of 24 ull hypotheses out the 54 esults (Tble VIII). Peiod 2 esulted i 7 ull hypotheses out of 51tests, while Peiod 1 esulted i 11 ull hypotheses out of 34 tests (Tble VIII). The Etie Peiod esulted i 5 ull hypotheses out of totl of 54 tests coducted fo the peiod (Tble VIII). Fo the tests tht filed to eject the ull hypothesis, it mes tht thei coeltio coefficiet,, is equl to zeo. Tble VIII Numbe of ull hypotheses obseved i ech peiod Peiod Vibles Numbe of ull hypotheses Totl 1 Idices 7 11 Compies 4 2 Idices 4 7 Compies 3 3 Idices 8 24 Compies 16 Etie Idices 1 5 Compies 4 Howeve, i the sttisticl lysis coducted i this esech study -vlue of zeo does ot me tht thee is o coeltio. This is becuse the study tested oly the lie coeltio eltioship. I this istce -vlue of zeo mes meely tht thee is o lie coeltio eltioship betwee the commodity pices d eithe idices o stocks of idividul miig compies. Fo the tests tht ejected the ull hypothesis, the -vlue is less o gete th zeo. This mes tht the lie coeltio eltioship tht exists betwee commodity pices with idices d stock of idividul miig compies is eithe positive o egtive. Tbles VII d VIII idicte tht thee exists coeltio betwee miel commodity pices d she pices of miig compies. It ws lso ecessy to lyse how esposive ivestos wee to miel commodity pice chges by obsevig whethe thee is phse lg betwee chges i miel commodity pices d the subsequet chges i miel commodity bsed idices d she pices of idividul miig compies. To estblish whethe thee is phse lg i ivestos esposes to chges i miel commodity pices, phse lgs of 1 moth d 3 moths wee comped to the esults without y phse lg, i ode to estblish whethe thee ws shift i the toughs d cests 466 JULY 2011 VOLUME 111 The Joul of The Southe Afic Istitute of Miig d Metllugy

9 text:templte Joul 8/8/11 11:50 Pge 467 Empiicl coeltio of miel commodity pices T s c t i o Figue 4 FTSE Gold Mies Idex: Bse cse, 1-moth d 3-moth phse lg of gold spot pice of gphs plotted fom djusted pices of commodities gist pices of idices d she pices of idividul miig compies. A exmple of how the lysis ws doe is show i Figue 4. Fom Figue 4, it c be see tht the spot pice is i uiso with the idex pice, while the 1-moth d 3-moth phse lgs hve thei toughs shifted fowd. Fom the lysis coducted, it ws theefoe cocluded tht ivestos espose to movemet i commodity pice is immedite d thee is o phse lg. Itepettio of esults The esults wee lysed o peiod by peiod bsis so tht the peiods lysed wee split up ccodig to ecoomic evets tht took plce duig the etie peiod ude eview, d which impcted commodity pices diffeetly. The impct ws moe ticipted i Peiod 2, which is the GFC peiod. The peiods pio to d post the GFC peiod wee cosideed to be oml boom peiods. These thee peiods wee the comped to the Etie peiod. Geelly i sttistics, the clssifictios depicted i Tble IX e used i itepetig coeltio coefficiet vlues. I these clssifictios, the esults e gouped i ges to defie the stegth of the coeltio betwee vibles (Tble IX). The ges of the coeltio coefficiet epeset both positive d egtive coeltios. Fo exmple, if test betwee two vibles gives -vlue of 0.25 it c be itepeted s positive but wek coeltio, while test with -vlue of c be itepeted s hvig egtive but wek coeltio betwee tested vibles. Theefoe, i the itepettio of the -vlues of sttisticl lysis doe i this esech study, the stegth of coeltio fo ech test ws defied s idicted i Tble X. All five gold idices lysed i the study wee positively coelted with the thee sets of pices, i ll peiods tested. Spot d fowd pices of these idices ll yielded stog to vey stog coeltios oly. Log-tem pices coelted positively i ll peiods with the exceptio of the S&P/TSX Globl Gold Idex. It c be obseved fom Tble X tht fo Peiod 1 d Peiod 2, oly oe silve idex, the Solctive Globl Silve Mies Idex, ws lysed. TheUpTed.com Cdi Silve Mies Idex did ot hve dt fo the two peiods. Ovell, both silve idices wee positively coelted fo ll peiods d showed stog to vey stog coeltios oly. Two silve compies wee lysed i ll fou peiods. Silvecop metls yielded egtive coeltios fo spot d fowd pices i Peiods 1 d 2, d the Etie Peiod. Hochschild Miig o the othe hd ws positively coelted with ll thee sets of pices i ll fou peiods. Two coppe idices wee lysed i ll fou peiods, d both idices wee positively coelted with the thee sets of pices i ll fou peiods. The ISE Globl Coppe Idex yielded vey stog coeltios i ll peiods fo spot d fowd pices. Log-tem pice yielded vey stog coeltios except fo the Etie Peiod, whee the idex yielded stog coeltio.the Solctive Globl Coppe Idex yielded stog coeltios fo spot d log-tem pices, while its fowd pice yielded vey stog coeltios. Avil Miig d Plbo, the two coppe compies tht wee lysed, both yielded combitio of positive d egtive coeltios. Avil Miig yielded mily positive d stog coeltios fo ll thee sets of pices. Howeve, whe the esults e lysed o peiod by peiod bsis, Peiod 1 d the Etie Peiod yielded wek to stog coeltios. Plbo yielded egtive d wek coeltios fo spot d fowd pices, while yieldig positive d modete coeltios with the log-tem pice. Tble IX Itepettio of the stegth of coeltio esults Coeltio coefficiet ge Stegth of coeltio Wek Modete Stog Vey stog P p e The Joul of The Southe Afic Istitute of Miig d Metllugy VOLUME 111 JULY

10 text:templte Joul 8/8/11 11:50 Pge 468 Empiicl coeltio of miel commodity pices Tble X Summy of coeltio stegth of vibles ove the fou peiods tested Discussio d coclusio The mket cpitliztio of miig compy is diect fuctio of its stock pice, which is i tu diectly elted to commodity pices. The impotce of miel commodity pices i detemiig the vlue of poducig miig compy is highlighted by the fct tht futue csh flows e pojected bsed o commodity pices s key iput. Theefoe, esuig tht the coect set of pice pmetes e used i the vlutio is of pmout impotce. This esech idictes tht the spot pice of miel commodities does dive the she pice of miig compies tdig i those commodities. It is futhe suggests tht spot pice the th loge-tem pices should be used i y vlutio of stocks of miig compies i.e. tht el models the th omil models would ted to be moe ccute. This view is lso held by miig lysts who hve obseved tht ove the shot tem, the mket ects immeditely to chges i the spot pice of miel commodities, but seldom ects to lysts log-tem pice pojectios9. Howeve, miel commodity pices dive she pices up oly util the poit whee pofitbility stops to impovig. Theefte, othe fctos such s the compy s potetil fo gowth d the expeiece of its mgemet come ito ply. Ackowledgemets I Buvill d Mike Pice of Resouce Cpitl Fuds (RCF), Austli, e ckowledged fo iititig the esech d povidig the iitil dt fo the poject. Hek de Hoop is lso ckowledged fo gig ccess to the Bloombeg temil dtbse i the RMB liby. Refeeces 1. KLASEN, N. Impct of esouce pices d exchge te o esouce compy she pices listed o JSE Ltd. MBA poject esech submitted to the Uivesity of the Witwtesd, Johesbug, South Afic ROBERTS, M. Dutio d chcteistics of metl pice cycles. Resouce Policy pp RADETZKI, M. The tomy of thee commodity booms. Resouce Policy, vol. 31, o. 1, pp PINDYCK, R. d ROTEMBERG, J.J. The excess co-movemet of commodity pices. Ecoomic Joul, vol. 100, pp DEATON, A. d LAROQUE, G. O the behviou of commodity pices. Review of Ecoomic Studies, vol. 59, pp CASHIN, P.A., MCDERMOTT, C. J., d SCOTT, A. Booms d slumps i wold commodity pices. IMF Wokig Ppe No.99, (155) Buvill, I (2010). Vice Pesidet t Resouce Cpitl Fuds, Peth, Austli. Pesol commuictio. 2 Decembe Holmes, D (2010). Hed of Commodities, Commz Bk, Lodo, Uited Kigdom. Pesol commuictio. 9 Decembe Estehuzei, L (2010). Gold Alyst t Royl Bk of Cd, Lodo, Uited Kigdom. Pesol commuictio. 3 Mch JULY 2011 VOLUME 111 The Joul of The Southe Afic Istitute of Miig d Metllugy

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