We have already covered how gold price reacts to a stock market crash. What about the gold miners?

Just to recap, a crash is different from a bear market. Here we will define it as a sudden dramatic drop in price where there is panic selling in the stocks and the drop is quite large in magnitude. There is no fixed definition in terms of the magnitude of the drop but here we will use more than a 10% drop in a few days. We will just look at stock market crashes that occurred in the fiat era (i.e 1987, 2008, 2010, and 2020).

Gold miners in the stock market crash of 1987

Let’s start with the stock market crash of 1987. The S&P500 is shown in bars and the blue line represents the miners. For the subsequent crashes we will use the HUI index but was not able to use that for 1987 since it did not exist at that time. Instead, the XAU index is used as an alternatove gold miners index. On 19th October 1987, the S&P500 dropped by 20.4% in a single day (peak to trough). At the same time the gold miners dropped 16.8% but gold only dropped 2.75% (i.e. the gold miners fell 6 times more than gold fell).

Gold miners and S&P500 in 2008

Although 2008 was more of a bear market, I have selected the period from from 29th September 2008 to 10th October 2008. Both the S&P500 (bars)and the HUI index (blue line) moved downwards during that time. In terms of percentage moves (peak to trough), the S&P500 was down 30.6%, the gold miners were down by a similar amount about (30%), whereas the gold price only was down 10%. The gold miners therefore fell 3 times more than gold fell.

Gold miners and S&P500 in the flash crash of 2010

The flash crash of 2010 occurred from 4th to 6th May 2010. During that period, the S&P500 fell 11%, the gold miners only fell by 3.7%, whereas gold only dropped 1.6%. The gold miners therefore fell 3 times more than gold fell.

Gold miners and S&P500 in the crash of 2020

An finally we come to the crash of 2020. From 21st February to 23rd March 2020, the S&P500 dropped 34.8%, the gold miners fell by a similar amount (33.2%), whereas gold only dropped 10 percent. Again, the gold miners therefore fell 3 times more than gold fell.

We can conclude that when the stock market crashes, in most cases the gold miners fell by a similar percentage as the general stock market. Interestingly the gold miners also fell three times more than the gold price fell (the exception was 1987 when the gold miners fell 6 times more than gold).

Correlation between gold miners, gold price and stock market

What is the reason for these observed relationships? The above chart shows the HUI index (bars), gold price (orange), and S&P500 (blue) on the monthly scale. The lower sections of the chart show the correlation between the HUI index and S&P500 (blue) and gold (orange). Most of the time the gold miners are strongly positively correlated to the gold price with no episodes of negative correlation. That means that the gold miners move in the same direction as the gold price. The correlation between the gold miners and the stock market is variable, swinging between positive and negative correlations. That means that the miners are more influenced by the gold price than by the stock market. How does that explain our conclusion? Why do the gold miners fall three times more than gold? That is due to the beta of the gold mining stocks to the gold price.

The beta of gold miners to gold and S&P500

The lower sections of the chart above show the beta of the gold mining stocks to the S&P500, and to the gold price. Interestingly, the beta of the gold miners to gold is mostly between 2 and 3. That means that if gold moves up by a certain amount then the miners move up by two to three times that amount. Note that beta works in both directions, so if gold goes down by a certain amount the miners will go down by two to three times that amount.

The beta of the gold miners to the stock market is very different. Most of the time the beta oscillates between -1 and +1.

These observations explain our conclusions.

Overall, when a stock market crash occurs, then margin calls force people to sell their gold, which causes a drop in the gold price. As a result of the drop in the gold price, the gold mining stocks drop by a greater amount than gold price drops. This suggests that the drop in the miners does not necessarily occur due to a direct relationship with the stock market per se, but rather to the relationship with the gold price.