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Global Macro: What Influences GDX

NEW YORK (TheStreet) - Gold-mining stocks have experienced some wild price swings over the past few days on news about U.S. monetary policy, leading traders to question what exactly influences the mining index?

Both the price of gold and the strength of equities determine the direction of gold-mining stocks, and through regression analysis, we can see which factor plays a bigger role.

The chart below is of Market Vectors Gold Miners ETF (GDX), SPDR Gold Shares (GLD), and SPDR S&P 500 (SPY). The graph analyzes the relative performance of the three indexes this year.

Equities have been the relative leader, while gold is the second strongest and gold miners the weakest. That is odd considering the equity portion of gold-mining stocks should make them stronger than the physical commodity of gold.

Equities have been aided by the belief that the economy is on a gradual and sustainable recovery from its 2008 lows. Similarly, a stronger U.S. dollar and improved consumer sentiment have driven equity markets to record highs.

Meanwhile, gold may have ended its cyclical bull market in 2011, and now looks to trend lower long term. The investor fear that led to gold's exponential growth in years past is now gone, and the Federal Reserve is attempting to make the transition to life after stimulus.

The regression results show that the price influence of equity indexes and the physical commodity of gold account for about 80% of daily price fluctuations in gold-mining stocks. When broken down to each component, gold is the bigger contributor.

The regression model comes equipped with confidence intervals showing just how strong of an influence each asset has on gold-mining stocks. With more than 99% confidence, the model states the relationship between gold and gold-mining stocks is very strong.

The model shows that the relationship between equity indexes and mining stocks can show with only 86% confidence that a relationship exists between the two.

Although both 86% and 99+% seem like strong numbers, consider 95% confidence that a relationship exists is generally the bare minimum for regression studies.

The data, in essence, state that in the nine months, gold has provided a majority of the influence over mining stocks' movements compared to equities. That makes sense considering equities are at record highs, while gold and gold miners are trending downward.

Gold-mining stocks may be underperforming the physical commodity because investors are forward looking and see future gold weakness as hurting company revenue.

In sum, gold-related stocks may not be an attractive investment at this moment or for years to come.

At the time of publication, the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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