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The number, market cap and currencies
of the constituents of the HUI, XAU, GDX, XGD and CDNX indices differ
considerably from each other and, as such, each index presents a different
picture of what is really happening in the precious metals marketplace. This
article analyzes the make-up of each index to reveal the biases of each to
arrive at the answer to the question in the title.
The HUI Index
The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal
dollar weighted index of 16 large-cap (80%) and medium-cap (19.5%) gold
mining companies that do not hedge their gold beyond 1.5 years. The 3 largest
companies make up 41% of the index by weight with the remaining 13 companies,
at 4% - 5% each, making up the balance. Go here for current information.
The XAU Index
The Philadelphia Gold and Silver
Sector Index (XAU) contain 16 large (83%) and medium (15%) capitalization
weighted companies engaged in the mining of gold, silver and copper. The same
3 largest companies as in the HUI account for 51% of the index by weight. As
such, the XAU has a large-cap bias. Go here for current information.
The SPTGD (XGD) Index
The S&P/TSX Global Gold Index
(SPTGD) consists of 64 modified market capitalization-weighted companies (78%
large-cap; 19% medium-cap) involved in precious metals (primarily gold)
mining. The 3 largest cap companies dominate the index with 42% by weight. A
proxy for the index is the XGD which trades in Canadian dollars on the
Toronto Stock Exchange. As such, the XGD has a currency bias which is
explained below. Go here and here for current information.
The GDM (GDX) Index
The NYSE Arca
Gold Miners Index (GDM), as represented by the GDX etf
(see here
for details), is a modified market capitalization weighted index of 30
companies (72% large cap; 22% medium cap) involved primarily in the mining of
gold and silver. The 3 largest cap companies again dominate the index (at 30%
by index weight) but to a much lesser extent than in the HUI (41%), the XAU
(51%) or the XGD (42%). As such, the GDM/GDX has a medium-cap bias. Go here for current information.
The CDNX Index
The S&P/TSX Venture Composition
Index (CDNX) consists of 558 micro cap companies of
which 44% are involved in the early stages of the exploring, developing
and/or mining and 18% in oil and gas exploration. This is the only index that
gives insight into the price trends of micro-cap companies almost exclusively
(99.4%). The CDNX is valued in Canadian dollars and, as such, has a currency
bias like the XGD. Go here for current information.
How Best to Apply the Various Gold:Gold
Stock Ratios
The Gold/HUI, Gold/XAU and Gold/GDX Ratios
The Gold/HUI, Gold/XAU and Gold/GDX ratios divide the daily close of the
price of gold by the daily close of the value of the particular index and,
when charted over time, provide an excellent running representation of
relative strength and weakness between the two variables. That being said
there are significant differences between these indices, as follows:
- the
Gold/XAU ratio emphasizes what is happening primarily in relation to the
large-cap producers;
- the
Gold/HUI ratio emphasizes what is happening in relation to the
large/medium-cap producers;
- the
Gold/GDX ratio emphasizes what is happening primarily in relation to the
medium-cap producers
The Gold/XGD and
Gold/CDNX Ratios
The Gold/XGD and Gold/CDNX ratios, on the other hand, compare gold
denominated in U.S. dollars with stocks denominated in Canadian dollars. This
has the potential of skewing the results depending on the strength of the two
currencies relative to each other and, as such, should not be used when
evaluating the trends of their constituent stocks with that of gold bullion.
(To develop your own G/GS ratio chart
go to www.stockcharts.com and type in $GOLD:$HUI,
$GOLD:$XAU, etc. for the time frame you wish to examine.)
The CDNX/XGD Ratio
To identify developing macro trends between large/medium cap producers and
micro/nano precious metal explorers (the juniors)
the ratio to follow closely is that of the CDNX/XGD which, in addition to
highlighting the two different ends of the spectrum, are both valued in
Canadian dollars.
As mentioned above, the XGD index
follows the performance of 64 large, medium and small-cap companies and the
CDNX that of 558 micro-cap companies. Comparing the divergence of each index
to the other is an ideal way to determine if a developing trend is equally
affecting all mining shares in general, just the large/medium/small-cap
sector or just the micro-cap venture capital sector.
The CDNX to XGD comparison works
better than that of the CDNX to any one of the other mining sector indices in
that both the CDNX and the XGD are traded on the Toronto Stock Exchange in
Canadian dollars whereas the HUI, XAU and GDX indexes are denominated in U.S.
dollars and, as such, are susceptible to the influence of exchange rate
variances when comparing any one of them with the CDNX.
Gold sector analysts and commentators
always assume that the large-cap dominated indices, either alone or in
relation to gold, indicate the true current trend of the entire precious
metals mining sector but that is simply not the case. In doing so they ignore
the health and, as such, the price performance of the micro-cap gold and
silver exploring/developing/mining companies which represents in excess of
80% of the total number of companies in the precious metals sector. A
comparison of the CDNX with the XGD reveals a much more accurate picture of
what is truly happening in the gold mining sector.
Conclusion
So there you have it. You now know
the strengths and weaknesses of the more popular gold stock indexes, which
ones to use when determining their relationship with gold bullion based on
their market cap and how to compare the performance of the large/medium cap
sector with the micro/nano-cap sector.
Never again put
any credence in any analysis you read that has not made the distinctions
discussed above. All gold stock indexes are not the same. Each has its own
bias. Each tells its own - and different - story.
Lorimer Wilson
MunKnee.com
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