Gold Miners Index plays greater role in metals markets

Market rising

The American GDX Gold Miners ETF is slowly becoming the de-facto standard for measuring gold-stock performance. Nearing its eighth birthday, GDX has even usurped the venerable HUI gold-stock index as this sector’s metric of choice in many circles. While GDX has advantages and disadvantages compared to the traditional HUI, it is an excellent gold-stock benchmark. But it still falls far short of individual stock picking.

Gold-stock speculation and investment isn’t easy. Like any sector, it takes a great deal of experience and expertise to understand what the miners and explorers are doing and separate the wheat from the chaff. In some ways, analyzing gold stocks is even harder. As the consummate contrarian sector, gold stocks get very little coverage in the mainstream financial press. So the best of breed aren’t widely known.

This relative information vacuum leaves gold stocks somewhere between a challenge and a minefield for individual investors. Without the time or resources to spend years intensely studying this obscure little sector, it’s virtually impossible to pick the winners. This gap left by Wall Street’s total disinterest has been filled for decades by financial newsletters. Rare contrarians like us do the heavy lifting and sell our results.

Back in early 2006 as the exchange-traded-fund boom was just ramping up, gold stocks were actually flying. The flagship NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index, better known by its symbol HUI, had rocketed 98.4% higher in just over 8 months! Excitement in gold stocks was as great as it’s been in their entire secular bull, a perfect environment for Van Eck Global to launch its GDX ETF.

While ETFs are common and ubiquitous today, GDX was revolutionary at its birth. It gave individual and institutional investors and speculators an easy and efficient way to get instant diversified exposure to the world’s best gold-mining stocks. The fund’s custodians did all the hard ongoing research work, aided by market capitalizations which always separate the winners and losers. GDX proved a success.

With decades of experience studying and trading gold and silver stocks, we were never super-interested in GDX at Zeal. Diversification is important, but a smaller handpicked portfolio of the best elite stocks will always outperform a larger diversified one. So we stuck to our old game of ferreting out the best gold and silver stocks to buy individually. But we kept close watch on GDX, over 6 years ago I wrote my first essay on it.

Now on those rare days when gold stocks are discussed on CNBC, the HUI is never mentioned. In this new ETF-dominated world, the dominant ETFs have replaced minor sector indexes as the leading benchmarks of choice. So to mainstreamers not steeped in gold-stock trading experience, GDX is the gold-stock sector. So we’re long overdue for revisiting its construction, components, and performance.

GDX tracks its own modified market-capitalization-weighted index, the NYSE Arca Gold Miners Index. Market-cap weighting is without a doubt the best way to construct an index. Over time in free markets companies are stratified by their market caps, which reflect their past successes, current execution, and future potential. The winners are bid up to higher market caps, while the losers are sold down to lower ones.

GDX currently has 39 component companies, the largest 7/8ths of which are listed in this table. Their market capitalizations and relative market-cap weights within this population are shown, along with each company’s weighting in GDX and the gold-standard HUI. GDX is quite interesting, both similar to and different from the HUI. Its custodians have done a great job in creating a fine gold-stock benchmark.


GDX’s best attribute after ease of trading and instant diversified gold-stock exposure is the smart way that its components are weighted. GDX’s weightings are virtually identical to their relative market caps among each other. This avoids the common ETF pitfall of custodians subverting the results of free-market bidding to impose their own biases on their portfolios. The best companies win the largest market caps.

This weighting methodology is better than the HUI’s. With only 18 component stocks compared to GDX’s 39, market-cap weighting is a lot harder. So the HUI’s custodians essentially assign the top two companies a weighting near 15% each, the third around 10%, and then split the remaining 60% among the remaining components roughly equally. This gives the smaller companies an outsized index impact.

That would be fine if they were the best of the smaller gold miners, but unfortunately they aren’t. Some of the highly-weighted smaller-market-cap components of the HUI have had big problems ranging from production issues to poor management to geopolitical challenges, and their performance has suffered. If a better subset of the smaller gold miners shown above was picked, the HUI’s performance would improve.

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