Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold and Gold Stock Indices

Commodities / Gold and Silver 2016 Jul 23, 2016 - 03:09 PM GMT

By: Arkadiusz_Sieron

Commodities

Investing in particular gold stocks gives exposure to movements in price of gold, but also to other factors affecting the gold mining industry, as well as company-specific strengths and weaknesses. This is why investors have to bear in mind the trends in the gold market as well as the mining industry, and wisely select appropriate stocks. One way to avoid the problem of selecting the promising shares (for instance for those that don’t have access to tools that would make the selection easier) is to invest in the index of gold mining companies.


There are several options available for investors, but the two most watched indices are: the NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (called the HUI Index) and Philadelphia Gold and Silver Index (called the XAU Index). The former is a modified equal dollar weighted index of 14 companies involved in gold mining which do not hedge their production beyond 1.5 years. It was developed in 1996 and is still traded on the NYSE. The XAU is a capitalization-weighted index of thirty precious metal mining companies that has been traded on the Philadelphia Stock Exchange since 1983. Another closely observed gold mining index is the NYSE Arca Gold Miners Index, which is a modified market capitalization weighted index comprised of precious metal mining companies. Its performance is tracked by the Market Vectors Gold Miners ETF, which – as an exchange-traded fund – is an interesting option for gaining exposure to gold miners.

There are three main differences between the HUI and XAU indexes. The former includes only gold miners who do not hedge their gold production beyond 18 months, while the latter consists of companies who use such hedging, and includes both gold and silver miners. Actually, the XAU Index also includes companies that mine other metals, such as copper, and for whom gold is only a byproduct. For example, Freeport McMoran is the largest component of the XAU Index (it makes up 8.45 percent of it), but its gold sales generate only 10 percent of the company’s revenues. Therefore, it seems that the XAU Index is a less reliable indicator of stocks’ sensitivity to movements in gold prices than the HUI Index.

Moreover, the indices attach different weights to particular companies. For example, the three largest companies constituting the HUI Index make up 40 percent of it, while the same companies amount to just 24 percent of the XAU Index. It means that the latter is more diversified and better reflects trends in medium-cup companies.

This is why there will be differences in indices’ performance. Indeed, as you can see in the chart below, although the two indices are positively correlated, the HUI Index is often slightly more sensitive to movements in gold prices than the XAU Index.

Chart 1: The price of gold (yellow line, left axis, London P.M. Fix), the HUI Index (green line, right axis), and the XAU Index (red line, right axis) from 1996 to 2016.

It makes perfect sense, as the HUI Index includes only gold miners and excludes companies using long-term hedging, reducing the sensitivity of bullion’s price volatility. For example, during the financial crisis in 2008, the HUI index collapsed by 70.6 percent, while the XAU Index plunged 68.2 percent. Given the fact that the price of bullion fell around 30 percent, the leverage offered by gold miners was higher than 2 in that period. Investors should always remember that leverage provided by gold stocks enables magnifying both gains and losses from the bullion market, as in our example. It also shows that gold behaved as a safe-haven asset when compared to mining stocks during the financial crisis, despite the initial price decline.

However, the conventional wisdom about the leverage offered by gold stocks does not hold in the long-term. As one can see in the chart 3, bullion outperformed both indices of gold mining companies in the long-run. The price of gold is now more than three times higher than in 1996, while the HUI Index is only 8.7 percent higher and the XAU Index actually lost almost 40 percent of its value in the last twenty years. It means that the gold mining equities performed relatively poorly compared to gold. Of special interest is the fact that their performance was also weak when compared to the general stock index, such as S&P 500, through that period.

Summing up, mining shares are correlated with the price of gold, but they should be viewed as a different asset class than bullion and related derivatives. Gold is insurance against market turmoil with no counterparty risk, while mining companies clearly have such exposures. Investors can limit the distinctive risks associated with particular mining businesses by investing in some indices of gold stocks. However, they do not track the price of gold accurately since they include companies producing other metals or the heavy hedging. The general stock market trends affect mining stocks in a different way than they do for gold. The mining stocks also behave distinctly during business cycles. Despite the conventional wisdom about the leverage offered by gold stocks, historical analysis shows that in the long-run bullion outperformed mining equities. It means that for long-term investors who would like to get full exposure to gold – especially for some insurance against black swan events – it makes sense to buy bullion, futures or ETFs rather than to invest in gold miners. Investors who want to invest in gold shares should consider active trading rather than adopting a “buy-and-hold” approach.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in