Back to Basics: Examining the XAU

Traders often talk about the XAU, but what does it stand for? It's the ticker symbol for the Philadelphia Stock Exchange Gold and Silver index, which tracks the performance of a basket of gold and silver mining stocks.

Investors often get interested in this index during times of uncertainty, when anxiety triggers a rise in gold prices. This so-called "flight to gold" often leads to a strong performance in the XAU when other sectors of the market have been performing poorly. For that reason, some traders attempt to hedge their exposure to stock market volatility by placing bullish trades on the XAU.

Any index is really just an average of stock prices. For example, the S&P 500 index represents the average of 500 stocks. When the index rises, it suggests that most stocks are moving higher.

On the other hand, when the S&P 500 moves lower, it suggests that the stock market is falling. While the S&P 500 is used to gauge the performance of the whole stock market, some indices are designed to track the performance of specific industry groups. The XAU is an example of one of those sector indices.

The XAU is not computed as a simple average of a group of stock prices. Instead, like the S&P 500 and many other indices, the XAU is a capitalization-weighted index, which means that the larger companies in the index account for a greater percentage of the index's value.

As you can see in the table below, bigger companies like Newmont Mining (NEM Quote) and Barrick Gold (ABX Quote) have a greater weighting within the overall index. In fact, the top four companies account for 70.4% of the total index. These companies tend to be sensitive to the price of gold. As a general rule, when the precious metal rallies, the XAU climbs higher. When gold falters, the index performs poorly.

What Makes Up the XAU Here are the index components and their weightings
XAU Component	Market Value ($ in thousands)	% of XAU
Newmont Mining (NEM:NYSE)	$10,078,753	23.84%
Barrick Gold (ABX:NYSE)	7,931,349	18.76
Anglogold (AU:NYSE)	6,694,210	15.84
Gold Fields (GFI:NYSE)	5,093,896	12.05
Placer Dome (PDG:NYSE)	3,484,307	8.24
Freeport McMoRan (FCX:NYSE)	2,124,050	5.03
Harmony Gold (HMY:MYSE)	2,477,687	5.86
Goldcorp (GG:NYSE)	1,888,006	4.47
Meridian Gold (MDG:NYSE)	1,108,061	2.62
Agnico-Eagle (AEM:NYSE)	871,128	2.06
Apex Silver (SIL:Amex)	517,989	1.23
Source: Optionetics