Gold INDEX
Gold Fund Index is the most representative of any precious metals index in the world. Currently, several Gold Indices exist there.
The two most widely known are the Philadelphia’s Gold & Silver Index i.e.
Ø XAU Gold Stock Index: The XAU is a capitalization-weighted index. The XAU was started on January 1979 with a value of 100.
Ø BUGS AMEX HUI: The HUI is a modified equal dollar weighted index. The HUI was started on March 15, 1996 with a value of 200.
These indices by themselves do not have many components but only represent a few companies in the Gold sector of the Stock Market. HUI contains 15 stocks and XAU contains 16 stocks. These indices are not only different in the number of stocks they represent but also in the proportion of hedged and unhedged stocks that they contain and in the way they are calculated. If we had an index that combines these two indices we could get a better representative sample of the Gold sector and better represent the proportion of hedging and its influence within the sector.
The major difference between the two is that the BUGS index is made up exclusively of mining stocks that do not hedge their gold positions more than a year-and-a-half into the future. This makes the BUGS Index much more profitable than the XAU when gold prices are rising, but can also compound its losses when gold declines.
The New Gold Index was composed in 2002 and that the HUI just recently was changed from 12 stocks to 15 components. AMEX added 2 new stocks that began trading in Dec. 2002 or Jan. 2003. These two new stocks namely IAG and GOLD, which are not included in the New Gold Index at present. This New Gold Index consists of 26 stocks, which represent a larger proportion of Gold stocks.
Gold funds are different from gold exchange-traded funds (ETFs) and should not be confused with the later. Gold funds are MFs that invest primarily in the stocks of companies that are active in mining of gold and other precious metals like platinum, silver and also diamonds. Gold ETFs, on the other hand, invest solely in pure gold. Since gold funds invest in equities of gold mining companies, their correlation with the equity market is much higher than that with gold bullion, and hence, they are known to move in tandem with the equity market.
For comparison charts has been included of the Gold Prices with XAU and HUI so that one can view all indices together.
It is simply an arithmetic sum of all of the component stocks. So if all of the stocks rise then the index rises. Each stock is as important then the next. These charts show that when gold prices are on the rise, the Gold XAU and HUI Index provide an excellent way for investors to capitalize on that increase. As we can see in the month of October –Dec when the prices of gold continuously increased then the XAU and HUI index also increased. The correlation between Gold prices and HUI has 0.82163 and XAU and Gold prices has 0.77981. It shows that the index has a high correlation to the prices of gold.
