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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Saturday, June 21, 2008

Emerging Gold Producer Index Outperforms Other Indices



The “theory” behind the Gold Stock Strategist investment style is that emerging junior gold producers should outperform other related investment styles. It is difficult to prove this hypothesis beyond a shadow of a doubt.

However, there are some simple metrics that can be used to test the Gold Stock Strategist hypothesis. The easiest is to compare the Year to Date (YTD) return of alternative precious metal or junior mining indexes.

Earlier this month, I announced the creation of the “Gold Stock Strategist Emerging Gold Producers Index (TM)” (GSSEPX). As the bar chart above shows, the theory underlying the Gold Stock Strategist seems to be holding against other indices based on companies. The GSSEPX is outperforming major precious metal related company indices in 2008. Yet it lags behind the price of gold YTD return.

The composition of the GSSEPX is subjective as are all indices and what is included or excluded is fair game for invalidating the hypothesis. In defense of the GSSEPX as a fair representation of the universe of emerging junior gold producers is that the 17 stocks comprising the index represent about 40% of all emerging junior gold producers.. Each company represents 1/17 of the total index. The top performers so far this year in the GSSEPX index are Kinbauri Gold, San Gold, Timmins, Metanor, and Aurizon (see below).



There are some general criteria that are used that are just common sense for managing risk. For example, one criterion is that the GSSEPX does not include companies that have operations in countries with high political risk even if they meet all other criteria.

There is also one obvious exception to the major criterion that companies must be within 12 months of entering into bulk sampling stage of production. On the exceptions list is Kinbauri Gold, unlikely to be in production until 2010—and more than a year away from their first bulk sample. The promise of this company is so compelling in my opinion that I think it deserves to be on the early radar screen of investors interested in emerging junior gold producers. It also offsets to some extent the inclusion of Jaguar Mining, a company at the other extreme since it is coming up on celebration of its first two years of production.

Other indexes used for comparison include the XAU index, the HUI, index, the TSX Venture Exchange index, and the price of gold index represented by the ETF symbol GLD.

The XAU is an index comprised of 10 large cap precious metals mining companies traded on the Philadelphia exchange. Companies in the index include: Agnico Eagle Mines (AEM), Anglogold Ashanti (AU), Barrick Gold (ABX), Freeport-McMoran Copper and Gold (FCX), Gold Fields(GF), Goldcorp (GG), Harmony Gold Mining (HMY), Kinross Gold (KGC), Newmont Mining (NEM), and Pan American Silver Corp. (PAAS).

The HUI—AMEX Gold BUGS (Basket of Unhedged Gold Stocks) index is comprised of 13 major gold mining companies including Agnico Eagle Mines (AEM), Coeur D Alene Mines (CDE), Eldorado Gold (EGO), Gold Fields ((GFI), Goldcorp (GG), Golden Star Resources (GSS), Harmony Gold Mining (HMY), Hecla Mining (HL), Iamgold (IAG), Kinross Gold (KGC), Newmont Mining (NEM), and Randgold Resources (GOLD).

The TSX Ventuire Exchange index represents the 2,300 companies listed on the TSX Venture Exchange. The TSX Venture Exchange is a public venture capital marketplace for emerging companies who have not yet met the requirements for listing on the TSX, which deals mostly with well established companies. The TSX Venture index is a much broader index than the others and includes companies other than gold miners such as junior natural gas explorers and other companies—primarily in the natural resource sector.

Finally, GLD is an ETF that tracks the price of gold.

Again, so far the premise of the Gold Stock Strategist (greater value in emerging junior gold producers) seems to be holding up against other related gold mining stocks based on these simple indicators. Yet, holding GLD would have been a better play so far this year. As gold enters its “high season” beginning in August, it will be interesting to see how this theory holds up against the metal.

Best,

Gold Stock Strategist

1 comment:

MontyHigh said...

Nice going with the index. I suggest you pick a shorter acronym, e.g. GSSX from a branding perspective.

I suggest you get yourself searchable by Google News (by having multiple authors) and then periodically put out articles where you list each member in the index. That will pull in follows of all those companies who are searching google news for info on the companies.

Monty

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