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Introducing the New Gold and Silver Companies Index (GSCI)

Commodities / Gold & Silver Stocks Oct 26, 2009 - 02:26 PM GMT

By: Lorimer_Wilson

Commodities

Best Financial Markets Analysis ArticleTo meet the growing needs of investors interested in investing in the broader, yet small-, micro- and nano-cap skewed, precious metals mining sector (i.e. the ‘juniors’)  4 new indices have come on the scene lately to wide acclaim. They are the Gold and Silver Companies Index (GSCI) and the Precious Metals Warrants Index (PMWI) and 2 all encompassing commodity-related company indices (i.e. also including commodities other than just gold and silver) the Commodity Companies Index (CCI) and the Commodity Warrants Index (CWI).


These new indexes are ideal supplements or even replacements for the HUI and the XAU which only track the performance of large-cap gold and silver mining/royalty companies. The GDM is only slightly more skewed to small-cap mining companies. The CDNX is, at best, a make-do proxy for the performance of micro/nano-cap ‘junior’ mining companies that are almost exclusively involved in the exploration for gold and silver and the development of such sites for possible mining.

Below are descriptions of all the above mentioned indexes:

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 capitalization 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. See: www.nasdaqtrader.com/Dynamic/PublicIndex/XAU.txt for current updates.

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.  To invest in this index buy the Market Vectors - Gold Miners ETF. See:  http://www.amex.com/othProd/prodInf/opPiIndComp.jsp?prod_Symbol=GDM for current updates.

4. 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.  For current updates see: ftp.cdnx.com/SPCDNXIndex/Components.txt.

5. CCI is the symbol of the Commodity Companies Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies (with warrants of at least 24 months duration outstanding) that trade on the Canadian and U.S. stock exchanges. For index components see: www.preciousmetalswarrants.com/FreeBasicDatabase.htm

6. CWI is the symbol of the Commodity Warrants Index. It is an equal dollar-weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.   For index components see above URL.

7. GSCI is the symbol of the Gold and Silver Companies Index. It is an equal dollar-weighted index comprised of the 23 gold and silver mining and royalty companies in the CCI.

8. PMWI is the symbol of the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 27 gold and silver warrants, of at least 24 months duration, found in the CWI. Last Week’s % Performance(1)

  Prev. Wk Prev. Mo YTD(2)
Gold 0.2 6.5 19.3
Silver 0.1 10.4 56.4
HUI(3) -3.6 8.1 42.1
GDM(4) -3.5 8.4 37.8
CDNX(5) -1.2 8.8 94.9
TSX -2.4 4.3 47.5
S&P 500 -0.7 3.4 19.5
CCI(6) -5.4 7.0 102.4
CWI(7) -7.3 10.8 183.8
GSCI(8) -5.8 7.5 64.4
PMWI(9) -7.5 11.9 93.4

All calculations are based on U.S. dollar equivalents (2) Week ending October 23rd, 2009 Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

And why do we need 4 or 5 more precious metals mining company indexes? Simply because those in use today do not tell the whole picture and what they do tell is large-cap centric. As the above table clearly identifies, while both the HUI and GDM (representing the large-cap companies) are up 42.1% and 37.8% respectively YTD, the micro/nano-cap gold and silver mining/developing/exploring and royalty companies, according to the Gold and Silver Companies Index (GSCI) are up 64.4% YTD. That is a 60% difference in performance!

Were we to only rely on the performance of the HUI or GDM (or the XAU for that matter) indices we would not be getting an accurate picture of what was actually happening in the mining sector. The performance of the broader small/micro/nano-cap sector would be totally misrepresented. That is no longer the case with the presence of the GSCI.

It is not a perfect world in that the GSCI only includes gold and silver companies which also have warrants that trade but it is a major improvement from relying on the CDNX whose gold and silver companies make up only 44% of the total index components leaving it wide open to major influences by its oil and gas components and majority of its non-natural resource companies. A case in point is the new Commodity-related Companies Index (CCI) which, because it includes oil and gas operators and merchant banks, is up 102.4% YTD. The GSCI is not the absolute end-all but is a major improvement over the formerly available indices.

When and how should the various indices mentioned above be used by investors, analysts and financial and newsletter writers alike?

a) the HUI is a small-based and narrow index of companies engaged in the mining of gold (99.0%) in which the largest 5 companies account for approximately half of the total index weight. Conclusion: The HUI Index is best used to assess the trend of large and medium cap gold mining companies and should not be used to assess the trend of precious metals mining companies as a whole.

b) the XAU is also a small-based index of companies but engaged in both gold and silver mining. The largest 5 companies account for two-thirds of the total index. Conclusion: The XAU Index is best used to assess the trend of large cap gold and silver mining companies but should not be used to assess the trend of the precious metals mining sector as a whole.

c) the GDM is a more broadly based index both in number of companies included, the products mined and in the diverse range of companies included. 26% are large cap companies, 25% medium cap, 39% small and 6% micro). Indeed, the largest 5 companies only account for 41% of the total by index weight. Conclusion: The GDM Index is best used to assess the trend of the precious metals sector recognizing that the micro/nano sector is not well represented.

e) the CDNX is an extremely broadly based and diverse index of micro-cap 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. Conclusion: The CDNX Index is best used to assess the trend of micro/nano-cap companies of which the junior natural resource sector is a major component.

f) the CCI includes: - 100% of the commodity-related companies (with warrants of at least 24 months duration) - trade on the U.S. and Canadian stock exchanges i.e. 36 - the large-, mid- and small-cap components each make up 11%, i.e. 33% in total - the micro/nano sector components make up the balance of 67% - 21 of the component companies are gold/silver miners or royalty companies, 9 are misc. mining companies (uranium, molybdenum, zinc, etc.), 2 are in oil and gas production, 3 are commodity associated merchant banks and 1 is a precious metals mutual fund. Conclusion: The CCI is best used to trend the performance of a broadly diversified number of junior companies related to the commodity business.

f) the GSCI includes: - gold and silver miners and royalty companies (with warrants) that trade on the U.S. and Canadian stock exchanges - 22% of the companies in the index are large-cap, 17% are mid/small-cap and 61% are micro/nano-cap companies. Conclusion: The GSCI is ideal for tracking the performance of the full spectrum of gold and silver mining and royalty companies with warrants trading in Canada and the USA today.

g) the CWI includes: -  all (47) of the long-term warrants (+24 months duration) associated with commodity-related companies (36) that trade on the U.S. and Canadian stock exchanges. Conclusion: The CWI is the only such index available and should be used as a basis for commodity-related warrant selection and the tracking of their performance.

h) the PMWI includes: - all 27 gold and silver mining and royalty warrants of at least 24 months duration that trade on the U.S. and Canadian stock exchanges. Conclusion: The PMWI is the only such index available and should be used as a basis for gold and silver mining and royalty warrant selection and for the tracking of their performance.

The next time you read an article in which someone is claiming that one of the indexes discussed here is revealing this or that about the trend of precious metals mining stocks (and usually gold and silver stocks in particular) you will be in a position to know whether you are being given biased or informed advice and be able to take action accordingly.

The introduction of the Gold and Silver Companies Index (GSCI), and its subcomponent Precious Metals Warrants Index (PMWI), now make it possible for investors, analysts, financial and newsletter writers alike to better understand what is happening in the broader-based gold and silver marketplace and to accurately track its performance. It is about time!

Lorimer Wilson is Editor of www.MunKnee.com and Director of Marketing for the two sites outlined below. He can be contacted at Lorimer@preciousmetalswarrants.com

a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular. 

b) www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

© 2009 Copyright Lorimer Wilson- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Lorimer Wilson Archive

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