Comparing and Evaluating the HUI, XAU, GDM, SPTGD and CDNX

Indices
By: Lorimer Wilson

I ghost wrote an article back in February, 2006 for www.preciousmetalswarrants.com in

which I commented that “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 (on the basis of how a particular gold and/or silver mining index is
trending) ….. but they are not telling you the whole story.” Indeed, they are not!

“Like the broad market DOW 30, S&P 500, S&P/TSX and other indices, there are a
number (more than 40) of precious metals mining indices that dice and slice the
components of the precious metals mining sector to arrive at a wide variety of insights.”
Using any one of the 40 indices as a basis on which to comment on the performance of
the precious metals mining sector (PMMS) does not accurately reflect the true picture of
the sector without first knowing how each index is structured, the eligibility criteria used,
the number of companies included, the specific market capitalization of the components
and the degree of concentration and average market capitalization of each index. That’s
the fundamental problem. No one seems to understand how very different the various
PMMS indices are to each other and how using one over another will influence any
conclusions being drawn. Let me show you why. Below are descriptions of the four most
popular indices, as follows:

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 (i.e. based on market capitalization)
of 15 gold mining companies that do not hedge their gold beyond 1.5 years. The
American Stock Exchange maintains the index in accordance with its specific eligibility
criteria and reviews its composition on a quarterly basis adding or removing companies
in response to changes in the gold mining industry and to ensure, in their opinion, that
companies included in the index are still a fair representation of gold mining companies.
The best way to invest in this index is through options traded on the index. For current
updates see http://amex.com/othProd/prodInf/OpPiIndComp.jsp?Product_Symbol=HUI
2. XAU is the symbol of the Philadelphia Gold and Silver Sector Index and is a market
capitalization index of 16 companies. The Philadelphia Stock Exchange maintains the
index in according to its own eligibility criteria and reviews its composition quarterly as
XAU Index options expire adding or removing companies, where necessary, to respond
to changes in the gold and silver industries and to ensure, in their opinion, that companies
included in the index are still a fair representation of the gold and silver mining sector.
The best way to invest in this index is through options traded on the index. See
www.goldsheetlinks.com/xau.htm for weekly updates.
3. GDM is the symbol for the NYSE Arca Gold Miners Index and is a modified market
capitalization weighted index of 32 gold and silver mining companies. The New York
Stock Exchange maintains the index according to its specific eligibility criteria and
reviews its composition quarterly adding or removing companies, where necessary, to
respond to changes in the gold and silver industries and to ensure that companies
included in the index are still a fair representation of the gold and silver mining sector.
The best way to invest in this index is via the Market Vectors - Gold Miners ETF (GDX).
See: www.vaneck.com/index.cfm?cat=3193&cGroup=INDEX&tkr=GDX&LN=3-03 for
updates.
4. SPTGD is the symbol for the S&P/TSX Global Gold Index and is a modified dollar-
weighted index of 19 precious metals mining companies. The Toronto Stock Exchange
maintains the index according to its own eligibility criteria and reviews the composition
of the index quarterly adding or removing companies from the index to respond to
changes in the gold and silver industries and to ensure that companies included in the
index are still a fair representation of the gold and silver mining sector. The best way to
invest in this index is via the iShares CDN Gold Sector Index ETF (XGD). See
http://.ca.ishares.com/product_info/fund_holdings.do?ticker=XGD for weekly updates.

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 restricted to only 11, almost
exclusively large cap companies and, as such, is hardly representative of the precious
metals mining sector as a whole.

CDNX is an index that is almost always overlooked in analyzing the performance of

companies in the precious metals mining sector, and specifically the huge but overlooked
junior exploration and development sector of the mining industry. The S&P/TSX Venture
Composite Index is a market capitalization index of 558 small cap companies, edited on a
weekly basis, 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. Specifically, of the 558 companies, 30% are engaged in the mining,
exploration and/or development of gold and/or silver (35% by market cap); 14% in the
mining/exploring/developing of other mineral resources such as uranium, diamonds, etc.
(21% by market cap); 18% in oil or natural gas pursuits (6% by market cap) with the
remaining 38% in non-resources operations. As Scott Wright concluded in a May’08
article entitled ‘Junior Golds and CDNX’ at www.zealllc.com “Since the CDNX is a
junior equity exchange, and since mining is its heaviest-weighted sector, and since gold is
in fact the king of metals and 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 tend to think that is indeed the case as does Gene
Arensberg in his December’08 article in www.resourceinvestor.com entitled “Got Gold
Report – Canadian Insiders Buying Despite Dismal CDNX.” As such CDNX is included
in this analysis of indices that best reflect the performance of mining stocks and gold
mining stocks in particular. See ftp.cdnx.com/SPCDNXIndex/Components.txt for weekly
updates.

For the sake of brevity I compare below, for the first time ever, only the four most
popular indices and the index that best reflects the performance of the junior (exploration
and development) mining sector as to:
a) the number of companies in each index;
b) the % influence of market capitalization in each index;
c) the % weighting of the top 3 and top 9 companies in each index;
d) the % weighting of gold, silver and other mining production by index.
 HUI XAU GDM SPTGD CDNX
# Components* 15 16 32 19 558

% Market Capitalization (# of Companies)*

Large Cap >6.0B 86.9%(8) 90.7%(9) 74.4%(8) 84.5%(8) 0.0%
Medium Cap 1.5 - <6.0B 12.7 (5) 7.4 (4) 18.2 (8) 14.0 (7) 0.0
Small Cap .3 - <1.5B 0.4 (2) 1.9 (3) 7.1 (13) 1.5 (4) 0.8 (1)
Micro Cap <.3B 0.0 0.0 0.3 (3) 0.0 99.2 (557)
Average Market Cap $10.4B(15) $10.1B(16) $5.3B(32) $8.4B(19) $23.5M

% Weighting by Company* ($*)

Barrick Gold ($41.9B) 15.5 26.0 13.8 24.1
NA
Goldcorp ($27.2B) 13.6 16.9 10.1 15.7 NA
Newmont Mining ($18.9B) 10.5 11.7 8.5 14.4 NA
Kinross Gold ($12.2B) 4.9 7.5 5.5 8.6 NA
Anglogold Ashanti ($9.9B) 4.9 6.1 4.7 5.7 NA
Sub Total: Top 5 Companies 49.4% 68.3% 42.6% 68.5% NA

Freeport McMoRan ($11.3B) 0.0 7.0 0.0 0.0 NA

Agnico-Eagle Mines ($9.8B) 5.3 6.1 5.4 6.0 NA
Gold Fields ($7.2B) 5.0 4.5 4.7 5.2 NA
Yamana Gold ($7.8B) 5.0 4.8 5.1 4.3 NA
Harmony Gold ($5.0B) 5.7 3.1 4.7 2.9 NA
Eldorado Gold ($3.7B) 5.2 0.0 4.5 2.1 NA
Sub Total Next 5 Companies 26.2% 27.8% 24.4% 20.5% NA

Top 10 Company Total 75.6% 96.1% 67.0% 89.0% NA

*As of Feb.06/09

Diversification by Mined Resource

Gold 99.4% 92.0% 96.0% 100.0% (35.5%
Silver 0.6 5.0 4.0 0 (
Sub Total 100.0 97.0 100.0 100.0 35.5
Other Mining 0.0 3.0 0.0 0.0 21.3
Oil and Gas Exploration 0.0 0.0 0.0 0.0 6.0
Misc. 0.0 0.0 0.0 0.0 37.2

There you have it and I think it tells it all. It is clearly evident that:
a) the HUI is a small based and narrow index of 15 companies engaged in the mining of
gold (99.4%) of which 8 are large cap companies accounting for 86.9% of the total by
market cap.
 Conclusion: The HUI Index is best used to assess the trend of large 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 a small based index (only 16 companies) engaged in the mining of gold
(92%), silver (5%) and copper (3%) and is dominated by 9 large cap companies
(accounting for 90.7% of the total by market cap) of which the 3 largest account for
54.6% of the total.
Conclusion: The XAU Index is best used to assess the trend of large cap precious
metals mining companies not the precious metals mining sector as a whole.
c) the GDM is the most broadly based index both in number of companies (19) and the
spectrum of market capitalization with 25% of the companies (8) being large cap, 25%
(8) medium, 40% (13) small and 10% (3%) micro. The index also has some silver mining
production representation (4%) and can be easily traded using the ETF proxy GDX.
Conclusion: The GDM Index is the best index to assess the trend of all but the smallest
of precious metals mining companies.
d) the SPTGD is similar to the HUI Index in market cap distribution and product
diversification and similar to the XAU Index in index weighting by company but the
majority of the companies in the index of 19 are not included in either the HUI or the
XAU indices.
Conclusion: The SPTGD Index is best used in conjunction with the XAU as they both
are weighted in a similar fashion, together include 24 different and market cap diverse
gold and/or silver mining companies and, as such, provide a much broader assessment of
precious metals mining company trends.
e) the CDNX is an extremely broadly based and diverse index of 558 companies of
which 35.5% are involved in the mining of, exploration for or development of gold and
silver mines and an additional 21% are involved in other forms of mining for copper,
molybdenum, nickel, diamonds, uranium, platinum, zinc. These companies have an
average market cap of only 23.5 million dollars (18.2 million dollars excluding the 14
companies with a market cap in excess of 100 million dollars) and are all competing for
the same financing and management acumen to make their operations viable and
prosperous.
Conclusion: The CDNX Index is an excellent proxy for assessing the health and trend
of the junior mining sector as a whole and is an ideal indicator of how the penny stocks
and warrants of the precious metals mining sector are performing and trending. Using
www.stockcharts.com to chart a $CDNX:$XAU ratio will go a long way to identifying
any divergence in the performance of large cap gold mining stocks to junior (micro cap)
gold mining stocks.

The next time you read someone’s interpretation as to what the HUI, XAU, GDM,
SPTGD or CDNX indices are revealing about the status of the precious metals mining
sector you will know whether you are being given biased or informed advice and be able
to take action accordingly.