An examination of Australian gold mining firms’ exposure over the collapse of gold price in the late 1990s

Abstract

Purpose-The purpose of this study is to examine the exposures of Australian gold mining firms in the highly volatile period from 1995 to 2000. This period has been characterized by significant changes in gold price due to bulk sale of gold by collective central banks. Specifically, the paper aims to investigate several firm-specific factors that are hypothesized to carry substantial influence on gold beta. Design/methodology/approach-To estimate gold beta, we use the following multifactor model: R g,t = α + β g G P R t + β x F X R t + β m R m,t + ε t , where R g,t is the return on the gold stock Index at time t, GPR t is the gold price return denominated in US dollar at time t, FXR t is the foreign exchange return of Australian dollar in terms of US dollar at time t, R m,t is the market return at time t, and ε t is the random error term at time t. Findings-The paper finds that the values of gold beta are consistently greater than one, implying the sensitive nature of firms' stock returns to gold price changes. This also suggests that investors holding gold mining stock would receive higher percentage increases in stock returns from a percentage increase in gold price returns, as opposed to investors holding gold bullion. Furthermore, these values have changed substantially over time with significant changes in gold price volatility. The most important and consistent relationship that we find is the impact of firms' hedging behavior on their respective gold betas. This is consistent with Tufano's study. It implies that firms, which hedge a greater proportion of their gold reserves, are less sensitive to movements in gold prices. The finding therefore supports the risk management theory that hedging increases shareholder's wealth. However, cash operating costs, cash reserves and the level of gold production seem to influence very little on the firms' exposure to gold price changes. Originality/value-This study is of interest and important to the stock mining companies and investors because the extent of the effect of gold price movements on the stock returns of gold mining companies has significant impacts on returns for both firms and investors especially in their risk management and investment decisions, respectively.

An investigation into the changing relationship between the gold price and South African gold mining industry returns

“…Gold exhibits further evidence of inflation hedging abilities as it is shown not to add any systematic risk to an investor's portfolio (McCown & Zimmerman 2006). This is in line with risk management theory, stating that hedging increases shareholder wealth (Fang et al 2007). According to McCown and Zimmerman (2006) the APT indicates that gold bears virtually no market risk, with an estimated beta close to zero, suggesting that it is advisable to include gold in the portfolio of an investor as a diversification and lowrisk asset.…”

“…However, Khoury (1984) and Rock (1988) argue that investment in gold mining company stocks is an inadequate alternative for investment in gold. The debate on the extent and pervasiveness of this relationship has continued into the 21st century (Arayssi 2013;Fang et al 2007;Twite 2002).…”

“…Even though there is no theoretical model to explain the 'safe haven' effect of gold (Baur & Lucey 2010), Gil-Alana, Aye and Gupta (2015), McCown and Zimmerman (2006) and Shafiee and Topal (2010) still suggest that gold is a valuable diversification tool as it provides returns that are uncorrelated with financial markets and has inflation hedging characteristics. Various previous international studies investigated whether investment in gold mining stocks provides similar investment benefits to investment in gold itself (Faff & Hillier 2004;Fang, Lin & Poon 2007;Gilmore et al 2009;Tufano 1998). The global financial crisis provides fertile ground for an investigation of the possible safe haven effect of investment in gold (Baur & Lucey 2010;Baur & McDermott 2010;Fei & Adibe 2010;Shafiee & Topal 2010).…”

“…Secondly, this study investigates the relationship in a South African context, which previous research has found to differ from the context of developed countries (Faff & Hillier 2004). Thirdly, this study applies the approach of Fang et al (2007) to divide the period of investigation into three sub-periods to investigate the possible change in the relationship between the gold price and gold mining stocks, thereby extending the current literature on the relationship between these variables during times of change.…”

Pitfalls of gold mine sites in care and maintenance

“…This data is based on the date given as the commencement of C&M on the Public MINEDEX database which may be sometime after a company applies for a mine site to enter C&M. Notwithstanding some lag effect, the overall trend is for more mines to enter the C&M stage during times of lower gold price (Figure 1). For instance, the peak in mines entering C&M, around 2000 ( Figure 6), corresponds to 20 year low gold prices during this time (Figure 1; Fang et al 2007). The peaks in C&M around 2003-5 and 2007-2009 occurred at times of short-term reductions in the gold price even though this was time of general recovery (Figure 1).…”