To examine the intermarket relationships between metals, we’ll look at the S&P/TSX Global Gold Index and the AMEX Gold Bug Index, or HUI.
The S&P/TSX Global Gold Index includes 25 precious metal mining companies traded on the Toronto Stock Exchange (TSX). It’s designed to be a dynamic international benchmark tracking the world’s leading gold companies. The intention of the index, which is calculated based on a modified market capitalization approach, is to provide an investable benchmark for publicly traded international gold companies.
The HUI is a modified equal-dollar-weighted index of companies involved in gold mining. The HUI and the Philadelphia Gold and Silver Index (XAU) are the two most watched gold indexes on the market. The HUI was designed to provide significant exposure to near-term gold price movement by including companies that do not hedge their gold production beyond 1.5 years. The HUI currently includes 15 of the largest and most widely held public gold production companies.
The vagaries of the mining business and the ascending Canadian dollar have caused the S&P/TSX Canadian Gold Index to underperform the HUI. From Feb. 19, 2001, to Aug. 16, 2011, the HUI was up 1,211.40% while the Canadian index was up only 413%. This relative underperformance creates opportunity.
With the Canadian dollar exceeding parity and probably topped out against the U.S. dollar, Canadian gold mining stocks may find greater traction compared to their American-listed counterparts.
We will use the S&P/TSX Global Gold Index and the HUI as our markets for trading the gold market. The S&P/TSX will be market one and HUI market two. We will trade the electronic gold /pit gold merged contract from Pinnacle Data. We tested both markets independently and, of course, they are correlated positively to gold. We optimized from four to 30 in two steps for both of our parameters.
The stronger of the two was the S&P/TSX Global gold index with 25 of the top 30 parameter sets (see "Two views of gold," above). Clearly, while these indexes are similar, their performance is not. Over our optimization, the average net profit for S&P/TSX is $57,525.82 vs. $44,793.52 for HUI test cases. For our best set of S&P/TSX parameters, we used a six-bar moving average for gold and a 14-day moving average for the index (see "Leading the way," below).
Intermarket analysis is a powerful tool for traders, and provides a true economic rationale for generating predictive analysis. Traders would do well to explore ways to incorporate it into their models.
Murray A. Ruggiero Jr. is the author of "Cybernetic Trading Strategies" (Wiley). E-mail him at email@example.com.