Tuesday, July 1, 2008

AMEX Gold BUGS Index

There are two major gold indices that dominate the gold market. These are the Philadelphia Stock Exchange's XAU and the AMEX's Gold BUGS Index.

The major difference between the two is that the BUGS index is comprised exclusively of mining stocks that will not hedge their gold positions more than a year-and-a-half into the future. This practice of unhedging their gold futures makes the BUGS Index much more profitable than the XAU as long as gold prices are rising. When gold prices are dropping however, losses are compounded. BUGS is an acronym for B asket of Unhedged Gold Stocks. The index was introduced on March 15, 1996 with a starting value of 200

The most positive characteristic of the BUGS index is that when gold prices are on the rise, the Gold BUGS Index is an excellent way for investors to capitalize on that increase. The index has a high correlation to the current market price of gold. The drawback of the BUGS comes when the price of gold declines. The unhedged Gold BUGS Index falls much faster than its hedged cousin, the XAU. Another issue is that the gold BUGS has an unusual index weighting system can be difficult to understand

The composition of AMEX Gold BUGS Index is made up of 15 of the nation's largest “unhedged” gold mining stocks . It is a “modified equal-dollar weighted” index. The result is that most of the index's component stocks are equally weighted. Despite the equality the largest stocks still carry a greater weight than the smallest

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