Market analysts, investment newsletter writers and financial planners are always commenting on how well, or poorly, the precious metals (read gold) mining sector is doing based on how a particular gold/silver mining index is trending but they are not telling you the whole story.
Why not? Because there are more than 40 precious metals mining indexes (indices) that dice and slice the components of the precious metals mining sector to arrive at a wide variety of insights and using any one of them as a basis on which to comment on the performance of the precious metals mining sector does not accurately reflect the true picture of the sector. Making investment decisions without first knowing how each index is structured; the eligibility criteria; the number of companies included; the specific market capitalization of the components; and the degree of concentration and average market capitalization of each index may lead to imprudent decisions. That’s the fundamental problem. Below are descriptions of four popular indices and a fifth one that has been largely overlooked by precious metals stock and warrant investors, analysts and investment newsletter writers alike:
1. HUI is the symbol of the AMEX Gold BUGS (Basket of Un-hedged Gold Stocks) Index and is a modified equal dollar-weighted index of 15 gold mining companies that do not hedge their gold beyond 1.5 years. The best way to invest in this index is in HUI options. See: http://amex.com/othProd/prodInf/OpPiIndComp.jsp?Product_Symbol=HUI for current updates.
2. XAU is the symbol of the Philadelphia Gold and Silver Sector Index and is a market capital-ization index of 16 companies in the gold, silver and copper mining industry. The best way to invest in this index is through options traded on the index. For weekly updates see: www.nasdaqtrader.com/Dynamic/PublicIndex/XAU.txt .
3. GDM is the symbol for the NYSE Arca Gold Miners Index and is a modified market capitalization weighted index of 31 gold and silver mining companies. The best way to invest in this index is via the Market Vectors - Gold Miners ETF (GDX). For current updates see: http://www.amex.com/othProd/prodInf/opPiIndComp.jsp?prod_Symbol=GDM .
4. SPTGD is the symbol for the S&P/TSX Global Gold Index and is a modified market capitalization index of 19 precious metals mining companies with a minimum market capitalization of US$240 million with no component having a weight in the index greater or equal to 25%. The index is maintained by the S&P/TSX Canadian Index Committee and is calculated in Canadian dollars. The best way to invest in this index is via the iShares CDN Gold Sector Index ETF (XGD). For weekly updates see: http://.ca.ishares.com/product_info/fund_holdings.do?ticker=XGD
(GOX is the symbol of another popular gold and silver index called the CBOE Gold Miners Index but it is not included in this analysis as it is limited to only 11, almost exclusively large cap companies and, as such, is hardly representative of the precious metals mining sector as a whole.)
5. CDNX is the symbol for the S&P/TSX Venture Composite Index. This largely overlooked index consists of 558 companies of which 63% are involved in either extracting natural resources from the ground or involved to some degree in the exploration and/or development of such resources. 44% of the companies are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources; 18% in oil or natural gas pursuits and 38% in non-resources operations.
As Scott Wright concluded in a May’08 article entitled ‘Junior Golds and CDNX’ at zealllc.com, “Since the CDNX is a junior equity exchange, and since mining is its heaviest-weighted sector, and since gold can be considered the driver of the mining stocks, is it too far-fetched to deduce that the CDNX is indeed a good, not perfect, proxy for the performance of junior gold stocks?” I agree! For updates see: ftp.cdnx.com/SPCDNXIndex/Components.txt.
Below the five indices are compared in detail as never before.
HUI XAU GDM/GDX SPTGD/XGD*** CDNX*** # Component Companies 15 16 31 19 558
% by Market Capitalization (# of Companies)**
Large Cap >6.0B* 80.1% (7) 82.5% (8) 72.1% (8) 77.6% (7) 0.0%
Med.
