Thursday, December 31, 2009

The Precious Metals Complex Volume Weighted Basket

that's a long name, but we'll just call it PMC for short.

the PMC includes 23 actively traded precious metals related stocks and ETFs. the basket is weighted according the average volume of each symbol over the past 2 years. components and the number of shares of each are listed below.

I decided to weight the basket according to volume, because the volume tells us how important the market considers each symbol. for example, GLD has traded 14.8 million shares a day on average over the past 2 years. rounding up I gave GLD 15 shares in the PMC basket. on the other hand, CEF only trades 1.1 million shares a day on average, so there is only 1 share of it in the basket.

requirements for inclusion were:

1) involved primarily in precious metals mining, or be an ETF that tracks bullion or holds performing mining companies.

2) listed on a US exchange with a current share price of at least $10.

3) must have average daily volume over the past two years of at least 1 million shares.

the only exception I made was to include SWC, which is trading below $10 at the moment. I made this exception because I want at least a token amount of platinum exposure, and besides, SWC shares were above 10 just a few weeks ago.

here's the list of 23 components and their weightings in the PMC basket:

I am calling the PMC a basket and not an index because I intend to keep the components and weightings as they are. if there are mergers or splits then we'll make some adjustments as needed, but that's it.

Purpose of the Precious Metals Complex Basket

the point is to measure the overall performance of precious metals investments as a whole in the proportion that each vehicle is active on a US securities exchange.

the PMC basket can be used track the performance of metals related investments in terms of US dollars (the basket's unit of account) or to compare metals investments to other sectors, the broad stock market, commodities, bonds, &c.

more importantly, I envision the PMC as a benchmark. an individual investor with a precious metals portfolio can compare his portfolio to PMC. if, over time, he is beating the PMC then he is probably doing something right. if the investor finds that he can't out-perform this benchmark on a consistent basis (and I'll just tell you right now that most of you can't) then he can either replicate the PMC basket in his own portfolio, or invest his money with a manager who has a track record of out-performing the PMC.

as I just alluded to, the PMC can also serve as a benchmark for professional money managers who have a mandate to invest in precious metals related investments. it will be interesting to see if John Paulson's much anticipated gold hedge fund can beat this PMC basket...

now I am going to compile the PMC's price history and work up some charts. check back later in the day for another post on the subject.