Chart of the Day – Commodities vs. Commodity Stocks

by Enis September 12, 2012 1:42 pm • Commentary

The commodity market has been on a tear in the past couple weeks, anticipating further easing from Bernanke and Co. at their announcement tomorrow.  Mr. Draghi has already delivered the goods.  The commodity market is expecting the FOMC to strongly deliver as well.

I wanted to compare the stocks’ performance to their respective commodities.  Gold miners have been major underperformers vs. the performance of gold over the last 2 years.  The earnings releases from the major miners in the 2nd quarter (GG, ABX, and NEM) all mentioned the continued rise of cash costs at their gold mining projects, squeezing their margins as gold has remained flat over the past year.  That simple trend explains a large part of the following chart’s divergence:



While gold is near its highs of 2012, GDX is still more than 10% lower than its 2012 highs.  In contrast, the oil producers have tracked crude oil quite closely over the past 2 years.  WTI Crude Oil’s local highs and local lows have been mirrored by the local highs and lows of XLE:



XLE has shown some relative weakness in 2012 vs. its performance in 2011 compared to crude oil.  Energy stocks have also been hurt by a trend of higher costs while the commodity price has been close to flat since mid-2011, but less so than the gold miners.  In addition, the valuation difference between the gold miners and major oil producers remains quite wide, with the market assessing the perceived value of XLE as (probably correctly) more resilient in bouts of commodity weakness.

Copper has also had a strong run in the past month.  The correlation between copper and FCX, the major U.S. copper producer, has been the highest of the pairs:



As a commodity stock, FCX is a much preferred vehicle to its energy or gold miner colleagues.  It gives you synthetic exposure to copper the commodity, and pays a dividend in the meantime.  Regardless, commodity stock volatility is likely to stay well above the market average as long as the broader commodity market shifts from bull to bear to bull in rapid fashion.