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Gold-mining stocks can play a role in diversifying a portfolio, but they are not the same as holding gold. Though gold-mining stocks are more correlated with gold price movements than stock price movements, they fall between the two asset classes from the standpoint of diversification.

This is the conclusion of a study to be published in a forthcoming issue of Alternative Investment Analyst Review. The study’s authors used exchange-traded funds to determine the diversification benefits of holding gold- mining stocks instead of gold. The specific funds were the Market Vectors Gold Miners (GDX), the SPDR Gold Shares (GLD) and the SPDR S&P 500 ETF (SPY).

Performance was analyzed from May 2006 through May 2015. During this sample period, gold had a higher average return than the S&P 500, and the S&P 500 had a higher return than gold-mining stocks. Gold-mining stocks also incurred roughly twice the return volatility of both stocks and gold.

A relatively small proportion of gold-mining stocks’ return variability was influenced by the S&P 500, with a monthly correlation of 0.19. Gold-mining stocks respond far more to variances in gold prices, with a monthly correlation ratio of 0.83. The S&P 500 and gold were nearly uncorrelated, with a monthly correlation of 0.07. (Correlation ratios range from 1.0—prices move the same—to –1.0, prices move in the exact opposite direction. A correlation of 0.0 implies that prices move completely independently of each other.)

These numbers show that neither gold nor gold-mining stocks are a hedge against the S&P 500. This is because they are positively correlated, whereas a hedge has negative correlations. Gold and gold-mining stocks are diversifiers, though gold works better as a diversifying asset class because of its lower correlation with the S&P 500. Notably, gold was not shown to be a safe haven during bear market periods for stocks. Rather, the study found the results to be statistically insignificant.

As far as which asset to hold for diversification, the study’s authors point to gold unless gold-mining stocks have higher expected returns or if an investor does not want to hold gold.

Source: “New Evidence on Whether Gold Mining Stocks are More Like Gold or Like Stocks,” Mark A. Johnson and Douglas J. Lamdin, SSRN, July 29, 2015.