Junior Golds and CDNX
Scott Wright, May 2nd, 2008
Scott Wright: Junior Gold Stocks-1
by Scott Wright
While recent activity in the gold stock sector has caused many of its battle-hardened investors to capitulate, the tried and true speculators still holding strong in the junior-gold-stock realm are feeling beaten and bloodied.
As a speculator in junior gold stocks I have not been immune to the carnage in this small sector either. And it's not difficult to hear the wailing and gnashing of teeth. The juniors are in the midst of a fear-driven sentiment storm that is fierce and unforgiving.
When I wrote about juniors a month or so ago I extolled their virtues and presented a case for an impending rally. But even going into a seasonally strong time for gold and gold stocks, it has felt as though the markets have chewed up and spit out the juniors with incredulous distaste.
Stepping back and taking a look at this latest gold upleg it is apparent that gold stocks have been in a state of malaise. Even with gold rocketing higher through $800 and not taking a breath until it hit $1000, gold stocks have not been returning the type of positive leverage that their investors have grown accustomed to.
Based on past uplegs we've been able to rationalize the lagging behavior of gold stocks to the performance of their underlying metal. After all, leverage does tend to increase toward the ends of uplegs when greed and euphoria grow rampant. Until recently fundamentals and technicals lined up for an end-of-upleg surge that had the potential to bring sweet redemption.
In anticipation of a gold stock rise investors have been able to use a number of metrics to monitor the greater gold stock environment. The XAU gold-stock index, the GDX gold miners ETF, and the venerable HUI gold-stock index are all vehicles that can serve this purpose.
These vehicles can be used mathematically to not only formulate performance figures but to plot charts allowing technical analysis. For example we can see that from the August 2007 lows to the March highs the HUI was up 72%. And we can also draw trend channels and plot moving averages to give us a visual compilation of past activity.
But no matter how much we slice, dice, and draw the HUI, junior gold stock speculators don't feel this gauges the performance of their class of stocks. Instead of trusting the HUI there is an overwhelming feeling that the juniors are underperforming. And speculators are feeling that their high-risk plays are the pariahs of the gold stock sector.
Unfortunately measured as a whole all these feelings are precisely this, feelings. As far as I know there is not a specific junior gold stock index in existence that measures the aggregate performance of the juniors. And this is of course understandable as a junior gold stock index would be very complex and difficult to manage.
While it is easy to look within your individual portfolio and see your handful of chosen juniors perhaps amplifying the losses of the major measuring sticks, it is very difficult to quantify this feeling of overall junior hatred. But even though there is not a specific measure of junior gold stocks, a vehicle does exist that can give us a pretty good tell on the activity of the overall junior constituency.
Most stock traders active in the commodities complex are familiar with the TSX Venture Exchange (TSX.V). Many folks consider the TSX.V to be the wild west of the stock markets. It is specifically designed to host an environment for junior companies to raise capital in the equity markets. And since this exchange resides in Canada, there is a proclivity for resources companies to populate the majority of the listings.
Like most exchanges around the world, the performance of the TSX.V can be measured on a real-time basis by an index. The symbol for this index is CDNX, which was an acronym for the former Canadian Venture Exchange. The full name of this index is the S&P/CDNX Composite Index and it is comprised of nearly 500 stocks while the exchange as a whole is home to thousands of stocks.
The genesis of the CDNX was a 1999 merger between the Vancouver and Alberta Stock Exchanges, becoming Canada's sole exchange for the trading of junior equities. As I'm sure you can infer, the CDNX was subsequently gobbled up by the Toronto Stock Exchange (TSX), hence the name change to TSX.V.
Admittedly I've just passively followed the CDNX index over the years only to know it as the place where some of my favorite juniors reside. But with the junior distress of recent I've received some feedback from folks asking me to take a closer look at the CDNX and scrub it up against the HUI.
Well even though there are more than just gold stocks comprising this exchange I decided to humor this idea and have a look. And as you can see below, just a quick visual glance shows stunning similarity between the HUI and CDNX.
With CDNX daily data available through the end of 2001, when it was acquired by the TSX, we are able to plot a six-year chart to show these two indexes scrubbed up against each other. And just so this chart is free from distortion I zeroed all axes so we can compare the precise slopes.
Well with the movements of the CDNX so similar to those of the 15 biggest and best gold miners that comprise the HUI, I decided to take a closer look at what it is made of. And not surprisingly this junior equity index indeed has a mining bias. In fact mining companies heavily weight the CDNX.
According to the Toronto Stock Exchange, in 2007 it held 57% of the listings of the world's public mining companies. Around 75% of these stocks are listed on the CDNX with the balance holding senior TSX listings. By my calculations mining companies comprise nearly 60% of the listings on the CDNX and hold about the equivalent market capitalization.
