New Gold/Silver Companies with Warrants Index

Finally, investors are getting a long-awaited insight into the performance of mid-, small-, micro- and nano-cap gold and silver companies. For too long they have had to make do with indices that ignore this sector. The HUI and the XAU 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. Not any more!

Van Eck Global has filed papers with the Securities and Exchange Commission for a new exchange-traded fund (ETF) that will target mid- and small-cap gold and silver companies. It will be the first small/mid mining ETF on the market joining its very successful Market Vectors Gold Miners ETF which mimics the NYSE Acra Gold Miners Index (GDM). The filing states that the ETF will follow a passive indexing strategy to capture a float-adjusted, market-cap-weighted index of smaller mining outfits.

To meet the growing needs of investors interested in investing in the small-, micro- and nano-cap precious metals mining sector (i.e. the ‘juniors’) and to closely watch the performance of the stock and warrants of those gold and silver mining and royalty companies 2 new indices have come on the scene lately to wide acclaim. They are the Gold/Silver Companies with Warrants Index (GCWI) and the Precious Metals Warrants Index (PMWI). 

Below are descriptions of the aforementioned indices:

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. 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. CCWI is the symbol of the Commodity Companies with Warrants 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. GCWI is the symbol of the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 23 gold and silver mining and royalty companies with warrants in the CCWI.
   
   
8. PMWI represents 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)

All calculations are based on U.S. dollar equivalents
(2) Week ending October 16th, 2009

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 47.5% and 42.8% respectively YTD the micro/nano-cap gold and silver mining/developing/exploring and royalty companies are up 75.1% YTD. That is a 58% difference in performance!.

Were one to only rely on the performance of the HUI or GDM (or the XAU for that matter) indices one would not be getting an accurate picture of what was actually happening in the mining sector. The performance of the small/micro/nano-cap sector would be totally misrepresented. That is no longer the case with the presence of the GCWI and to a lesser degree with the upcoming Van Eck offering.

It is not a perfect world in that the GCWI 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 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 with Warrants Index (CCWI) which, because it includes oil and gas and merchant banks, is up 115.1% YTD. The GCWI 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, financial and newsletter writers alike?

1. 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.

2. 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.

3. 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.

4. 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 are a major factor.

5. the CCWI includes 100% of the commodity-related companies, with warrants of at least 24 months duration, that trade on the U.S. and Canadian stock exchanges i.e. 36. The large-, mid- and small-cap components each make up 11% of the index with the micro/nano sector making up the balance of 66%. 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 CCWI is best used to trend the performance of a broadly diversified number of junior companies related to the commodity business.

6. the GCWI is geared to tracking the performance of those 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 GCWI 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.

7. the CWI contains 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.

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

Lorimer Wilson

***

To my readers:

Contact me at Lorimer@preciousmetalswarrants.com with questions and comments. I promise a reply. Don’t be shy - drop me a line or two. Guest Contributors are welcome – just send me a draft of your proposed article for consideration. That’s how I got started. It is a very enjoyable and stimulating activity. I will be speaking at the World MoneyShow in Toronto in October. If you attend please introduce yourself.

We have two web sites that we believe will help you make money in these very volatile times.

1. 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.
2. 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.