This Chart Explains Why Gold Moves the Peru ETF

October 9th at 9:25am by Tom Lydon

The iShares MSCI All Peru Capped ETF (NYSEArca: EPU) has plunged nearly 31% this year. The average loss for the SPDR Gold Shares (NYSEArca: GLD) and the iShares Silver Trust (NYSEArca: SLV) is about 25%. That high level of correlation between EPU, gold and silver is not a coincidence.

EPU, the lone Peru-specific ETF, allocates nearly 46% of its weight to the materials sector and that makes sense because the country is the world’s largest silver producer and the fifth-largest gold producer. EPU’s correlation with precious metals prices may be frustrating to investors, and understandably so, but it is warranted. [Peru ETF Rebounds With Metals Miners]

A reported released Tuesday by the World Gold Council and PricewaterhouseCoopers illustrates just how important gold is to the Peruvian economy. The report uses gross value added (GVA), which measures the contribution to gross domestic product (GDP), employment and taxes paid as a metric for measuring the impact of gold output on major gold producers’ economies.

Direct GVA from gold mining in Peru is estimated to be $8 billion, according to the report. “The average amount of economic value added per ounce of gold is US$1,139 and ranges from US$946 in China to US$1,352 in Peru in 2012. The differences between countries reflect variations in labour costs and productivity,” the report notes.

In dollar terms, Peru does not mine nearly as much as gold as China or the U.S., but as the chart below indicates, direct GVA from gold output as a percentage of Peruvian GDP is higher than in other major bullion-producing nations.

 

“Similarly, a study by the World Gold Council showed that the four largest gold mines in Peru directly employed 4,500 workers in 2011 and contributed 1.4% of Peru’s GDP (in 2010). Using a multiplier of 1.9, which the authors view as conservative, the study estimates that an additional 4,050 jobs were supported indirectly by mining operations. Throughout the supply chain, these four mines were estimated to generate additional salaries of US$240 million,” according to the World Council and PwC.

Those statistics confirm the notion that EPU is a high-risk ETF at times when gold prices are faltering

iShares MSCI All Peru Capped ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GLD and SLV.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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