Gold’s strong run is taking Canada’s equity benchmark back to its mining roots.
Eight out of 12 stocks that have been picked to join to the S&P/TSX Composite Index since June are precious metals miners.
Asset management firm Sprott Inc, which has a heavy focus on gold and silver investments, is also a play on metals.
Metals and mining stocks have a 14 percent weighting on the Canadian benchmark, up from almost 9 percent last year.
That is the biggest year-on-year increase since at least 2001, according to data compiled by Bloomberg.
The addition of several new names would increase that percentage. The index is to officially add Fortuna Silver Mines Inc, New Gold Inc, Osisko Mining Inc, Sprott and Trillium Therapeutics Inc after tomorrow’s trading close, while removing Cineplex Inc and Pason Systems Inc.
“You want the index to reflect exactly what’s going on at the time,” Horizons ETFs Management (Canada) Inc analyst Brooke Thackray said by telephone. “It’s not a forecasting mechanism. It’s just a what’s-taking-place-right-now mechanism.”
The S&P/TSX Materials Index, home to more than 30 Canada-based precious metals miners, has surged 32 percent this year — making it the second-best performing sector in Canada — on strong gold and silver prices.
Spot gold on Friday rose 0.4 percent to US$1,950.08 an ounce, virtually unchanged for the week.
Spot gold climbed to a record US$2,075.47 an ounce last month and while prices have declined since then, they are still up 28 percent this year, making the metal the second-best performer in the Bloomberg Commodity Index of 22 raw materials.
The rise has happened because of a weakening US dollar, plunging real rates and geopolitical tensions, all of which have motivated investors to seek shelter in precious metals.
One concern for index investors is: What happens when risk appetite comes back with a vengeance?
“There is a risk that all of a sudden gold goes down on a continuous basis. The index is designed so that you could actually take some of them out again,” Thackray said.
“If gold producers aren’t doing well and you take them out, then the index is actually doing its job. It’s changing over time to match the economic conditions and the representation of the stock market,” he said.
For Canadian stock-market bulls, gold is one way to mitigate the TSX’s structural challenge — a shortage of large tech companies that has led to underperformance compared with US markets.
While Shopify Inc has become an investor darling, foreign funds see the Canadian market as heavy on banks, energy and mining, Thackray said.
US Federal Reserve Chairman Jerome Powell’s latest remarks that the central bank would delay tightening until the US gets back to maximum employment and 2 percent inflation could propel gold stocks higher down the road.
Additional reporting by Reuters
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