Sunday , 24 September 2023

Which is Best Ratio to Use: Gold to HUI, XAU, GDX, XGD or CDNX? (+3K Views)

Purchasing Managers Index Relative to XAU Index Also Very Informative

This article will give you a better understanding of the differences in each of the more popular gold stock indices (HUI, XAU, GDX, XGD and CDNX) and how they should be used in conjunction with the price of gold to determine the future movement of gold bullion and gold and silver mining stocks and warrants. Words: 1414

So says Lorimer Wilson editor of  (It’s all about Money!). Please note that this paragraph must be included in any article reposting with a link to the article* source below to avoid copyright infringement. Wilson goes on to say:

The HUI Index
The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of 16 large cap (80%) and medium cap (19.5%) gold mining companies that do not hedge their gold beyond 1.5 years. The 3 largest companies make up 41% of the index by weight with the remaining 13 companies, at 4% – 5% each, making up the balance. Go here for current information.

The XAU Index
The Philadelphia Gold and Silver Sector Index (XAU) contain 16 large (83%) and medium (15%) capitalization weighted companies engaged in the mining of gold, silver and copper. The same 3 largest companies as in the HUI account for 51% of the index by weight. Go here for current information.

The SPTGD (XGD) Index
The S&P/TSX Global Gold Index (SPTGD) consists of 64 modified market capitalization-weighted companies (78% large cap; 19% medium cap) involved in precious metals (primarily gold) mining. The 3 largest cap companies dominate the index with 42% by weight. A proxy for the index is the XGD which trades in Canadian dollars on the Toronto Stock Exchange. Go here  and here for current information.

The GDM (GDX) Index
The NYSE Arca Gold Miners Index (GDM), as represented by the GDX etf (see here for details), is a modified market capitalization weighted index of 30 companies (72% large cap; 22% medium cap and 6% small cap) involved primarily in the mining of gold and silver. The 3 largest cap companies again dominate the index (at 30% by index weight) but to a much lesser extent than in the HUI (41%), the XAU (51%) or the XGD (42%). Go here for current information.

The CDNX Index
The S&P/TSX Venture Composition Index (CDNX) consists of 558 micro cap companies of which 44% are involved in the early stages of the exploring, developing and/or mining and 18% in oil and gas exploration. This is the only index that gives insight into the price trends of micro-cap companies almost exclusively (99.4%). Go here for current information.

How Best to Apply the Various Gold Ratios
The Gold/HUI, Gold/XAU and Gold/GDX ratios divide the daily close of the price of gold by the daily close of the price of the particular index and, when charted over time, provide an excellent running representation of relative strength and weakness between the two variables. The Gold/XGD and Gold/CDNX ratios compare gold denominated in U.S. dollars with stocks denominated in Canadian dollars which have the potential of skewing the results depending on the strength of the two currencies relative to each other and, as such, should not be used when evaluating their trends.

When a gold/gold stock (G/GS) ratio is climbing on a chart, it means the top number is outperforming the bottom number and vice versa. Usually if any one of the G/GS ratios mentioned here is rising significantly it is during a major index up-leg because gold stocks tend to rise much faster than the gold they mine. Why is that?

Well, let’s look at it this way: if gold is $1500 and the cost of production is $1000 and a year later gold is $1700 and the cost of production has gone up by 10% to $1100 then the profit of mining the gold has increased from 50% to 55%. As such, the cash flow of the mining company goes up and the size of the resource and the value of the company go up. Therein lies the leverage.

If this ratio is falling significantly though, it usually means a major correction is underway in the stock components of the various indices. Leverage is a double-edged sword, so gold stocks fall faster than gold in their periodic corrections. If gold falls more slowly than these various indices it is outperforming these indices and lowering the various ratios. Another problem with the various G/GS ratios is that they often flash signals during minor rallies and pullbacks and the more often they fire, the less likely their signals will be useful and profitable. As such, these various G/GS ratios are best used only as secondary confirmation and not as primary trading signals in isolation.

The point here is that in any G/GS ratio analysis, the more volatile of the two variables tends to overpower the less volatile. Since gold stocks are far more volatile than gold, their movements are more defining for the ratio than those of gold. With unequal volatility, there is never parity between the two variables in terms of their ultimate influence on the final ratio. (To develop your own G/GS ratio chart go to and type in $GOLD:$HUI, $GOLD:$XAU, etc. for the time frame you wish to examine.)

The CDNX/XGD Ratio
So what’s an investor to do to identify developing macro trends in precious metal stocks and warrants? One ratio to follow closely is that of the CDNX/XGD and another is the level of the Purchasing Managers Index relative to the XAU Index.

As mentioned above, the XGD index follows the performance of 64 large, medium and small-cap companies and the CDNX that of 558 micro-cap companies. Comparing the divergence of each index to the other is an ideal way to determine if a developing trend is equally affecting all mining shares in general, just the large/medium/small-cap sector or just the micro-cap venture capital sector.

The CDNX to XGD comparison works better than that of the CDNX to any one of the other mining sector indices in that both the CDNX and the XGD are traded on the Toronto Stock Exchange in Canadian dollars whereas the HUI, XAU and GDX indexes are denominated in U.S. dollars and, as such, are susceptible to the influence of exchange rate variances when comparing any one of them with the CDNX.

Gold sector analysts and commentators always assume that the large-cap dominated indices, either alone or in relation to gold, indicate the true current trend of the entire precious metals mining sector but that is simply not the case. In doing so they ignore the health and, as such, the price performance of the micro-cap gold and silver exploring/developing/mining companies which represents in excess of 80% of the total number of companies in the precious metals sector. A comparison of the CDNX with the XGD reveals a much more accurate picture of what is truly happening in the gold mining sector.

The Purchasing Managers Index
The Institute for Supply Management publishes a monthly Purchasing Managers Index (PMI) which indicates the extent to which the U.S. manufacturing economy is expanding or declining.

According to research by John Hussman, when the Gold/XAU (G/X) ratio has been greater than 5.0 and the PMI has been less than 50 , gold mining shares have appreciated at an average annualized rate of 125.6% the year following.

In contrast, when the G/X ratio has been less than 3.0 and the PMI has been greater than 50, gold mining shares have plunged at an average annualized rate of -49.9%.

Hussman points out that since 1974 the G/X ratio has been greater than 5.0 about 15% of the time and when it has been that high the XAU has followed with annualized gains of 89.6% on average; 27.4% when the ratio has been greater than 4.0 but an extremely disappointing -36.6% when the ratio has been less than 3.0. Given the similar tracking of the XAU with the HUI and the GDX similar percentage changes can be expected from the HUI and the GDX. For current ISM readings go here.

So there you have it. You now better understand the strengths and weaknesses of the more popular gold stock indexes; how ratios operate; the limitations and risks of using gold:gold stock ratios in isolation; how to track the performance of the micro-cap gold mining sector in addition to that of the large- and medium-cap sector; and understand the insightful relationship of the various indexes to the Purchasing Managers Index.


Editor’s Note:

  • The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
  • Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.