Canadian gold stock index replaced with a global one

Gold Index Takes Global Turn,
but Canadian Names Dominate

New S&P Vehicle More Inviting
to Investors Seeking Commodity Play

By David Parkinson
The Globe and Mail, Toronto
Wednesday, December 13, 2006

http://www.theglobeandmail.com/servlet/story/LAC.20061213.RGOLD13/TPStor...

Farewell, S&P/TSX capped gold index. Hello, world.

After the end of trading this Friday, Standard & Poor's, the Toronto Stock Exchange's index provider, will no longer publish its separate subindex of the Canadian gold mining stocks contained in the S&P/TSX composite index. In its place Monday morning will be the S&P/TSX global gold index, which will exist outside of the composite and will be made up not just of Canadian gold stocks, but of all the world's biggest publicly traded gold miners.

"It didn't really make sense to make this distinction between a Canadian gold index and a global gold index," said Steve Rive, vice-president of Canadian index services for S&P in Toronto.

"Because the gold industry is really affected by the global price of gold, and property ownership isn't really affected by where a company is based, there really wasn't a Canadian flavour to the business. It's really a global business."

That said, the new index will still be dominated by Canadian-based names, though their mining assets are spread throughout the world. Of the 30 constituent stocks in the global gold index, 22 are headquartered in Canada, including the biggest stock in the group, Barrick Gold Corp., with a 19-per-cent index weighting. (Most of the foreign companies being added to the index are South African.)

But now, investors buying the index will have a bigger, more diverse and, consequently, probably less volatile collection of stocks making up the gold sector index. The index will more than double in total market capitalization, to $158-billion from $74-billion, and its number of stocks will increase by 12 from the 18 members on the current TSX gold index. And by removing Canada-specific issues from the equation, the index should serve as a better pure gold play for investors looking to tap into a portfolio of gold equities as a proxy for bullion.

Indeed, that's the key business argument for globalizing the index: to make it more inviting to investors seeking a commodity play, something that has become increasingly in demand during the bull run for commodities. Bullion is up almost 150 percent since early 2001, and the TSX gold index is up 175 per cent.

S&P decided to make the change after consultation with clients, who felt a global index would be make for a more attractive investing vehicle for commodity players.

"We think the idea of having exposure to global gold stocks, rather than just Canadian ones, offers more value for investors," said Geri James, head of products for iShares Canada, the division of Barclays Global Investors that runs the $915-million iUnits S&P/TSX Canadian gold index fund, an exchange-traded fund that mirrors the index. The fund will continue to mirror the index when it assumes its new global look starting Monday.

She said the idea of a global gold index has been floating around for "a couple of years," as Barclays and other users of the index became concerned about the shrinking of the index as a result of merger activity that had thinned the ranks of senior Canadian gold stocks. "We thought it might be useful to have more diversification," Ms. James said. She added that Barclays discussed the issue with S&P prior to S&P's decision last May.

"The feedback we got [from clients] was certainly part of [the decision]," Mr. Rive acknowledged.

S&P indicated it has hopes that the broader, global index will generate more money for its index lucrative business, which licenses its indexes to clients who use them as the basis for investment products.

"Once launched, the index will serve as a leading global benchmark for gold portfolios, and further pave the way for the development of index-linked investment vehicles," it said in May, when it unveiled plans for a global gold index.

Coincidentally, it was also in May that gold commodity prices peaked, as booming energy prices and geopolitical concerns sent bullion above $700 (U.S.) an ounce for the first time in 25 years. While gold and gold stocks have come off their highs, the weak outlook for the U.S. dollar promises to keep the commodity propped up for some time to come, and that bodes well for the new global index. BMO Nesbitt Burns projects 2007 average gold prices at $720 an ounce, while Goldman Sachs forecasts that gold will average $700 or more for each of the next three years.

The top 10 by weighting, after Dec. 15

Barrick Gold, 19.3%
Newmont Mining, 15.4%
Goldcorp, 15.2%
AngloGold Ashanti, 10.8%
Gold Fields, 6.6%
Harmony Gold Mining, 3.9%
Agnico-Eagle Mines, 3.8%
Kinross Gold, 3.3%
Yamana Gold, 2.8%
Lihir Gold, 2.3%

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