Indices and commodities
An index is a basket, not a company. Gold is neither an equity nor a currency. Both behave unlike the things they are grouped with.
11 min read · beginner · lesson 2 of 6
What this covers
- Explain what an index price represents and how it is weighted
- Identify what moves an index that does not move its members
- Read breadth separately from the headline number
- Describe how index exposure is actually taken, and what that changes
- Describe what gold responds to and how commodities differ from financial assets
An index is a basket
An index price is a weighted aggregate of its members. It has no earnings, no balance sheet and nothing to deliver. You cannot own it; you take exposure through a derivative.
That makes an index a measurement before it is an instrument. It was built to describe a market, and trading it means trading the description.
Weighting decides behaviour
| Capitalisation-weighted | Price-weighted |
|---|---|
| Members counted by company size. | Members counted by share price. |
| The largest companies dominate. | The highest-priced shares dominate, whatever the company is worth. |
| S&P 500 and Nasdaq 100 work this way. | The Dow works this way, which is why it is a historical artefact as much as a measure. |
| A handful of members can carry the whole number. | A share split changes a member's influence without changing the company. |
The headline number hides participation
Breadth is how many members moved, against how far the index moved. The two come apart routinely.
An index up half a percent on four of its largest members rising, while most of the list fell, is a different market from one up half a percent on broad participation. The headline number is identical. What it describes is not.
This is the practical reason weighting matters. In a capitalisation-weighted index, a small number of very large members can produce a move that the majority of the market did not take part in.
What moves an index
Two forces that do not move individual companies. First, the discount rate: when rates rise, future earnings are worth less today, and the whole basket reprices regardless of what any member reported. Second, risk appetite, which moves capital into or out of equities as a block.
Underneath that sits aggregate earnings, which move slowly and set the longer-term level. Most short-term index movement is repricing, not news about the businesses.
Index composition also changes on a schedule. Members are added and removed, and every fund tracking the index has to transact to match, producing flow driven by the rules rather than by any view.
How the exposure is actually taken
- Cash index
- The published measurement itself, calculated only while the underlying market is open. Not directly tradable.
- Index future
- An exchange-traded contract on the index, with an expiry and a roll. Trades nearly around the clock, including while the cash market is shut.
- Index CFD
- A broker-quoted instrument tracking the index, with no expiry. Convenient, and priced by the broker rather than by an exchange.
- The opening gap
- Because derivatives keep trading overnight and the cash market does not, the cash index frequently opens at a level the derivative reached hours earlier. That gap is repricing that already happened, not a new move.
Gold is its own category
- Not an equity
- No earnings, no dividend, no management. Nothing compounds. Its return is price alone.
- Not quite a currency
- Central banks hold it as a reserve asset, and it strengthens when confidence in currencies weakens, but no one sets a policy rate on it.
- Real rates
- Holding gold earns nothing. When inflation-adjusted yields on government debt rise, the cost of holding a non-yielding asset rises with them.
- Physical flow
- Mine production, jewellery and industrial use, and central bank purchases set a slow-moving floor beneath the financial flows that dominate day to day.
Where commodities differ from financial assets
A financial asset is a claim. A commodity is a thing, and that changes its behaviour in ways a chart does not show.
It has to be stored, which costs money and puts a floor under the cost of holding it. It has a physical constraint on how fast more can be produced, so a shortage cannot be resolved by an announcement. And consumption is frequently seasonal, so the same inventory figure means different things at different points in the year.
Gold is the least commodity-like of the commodities, because most of what has ever been mined still exists and is held rather than consumed. That is why it responds to yields and confidence more than to production.
Three indices are close to one position
The major US indices share most of their largest members and all of their macro drivers. Long the S&P, the Nasdaq and the Dow at the same time is one bet on US equities expressed three ways, not three positions.
Contract sizes also differ enormously between these instruments. The same nominal move produces very different account outcomes, so position size has to be computed per instrument rather than carried across from another.
Both points land in the same place: count correlated index exposure as a single position when sizing, and compute that size against the specific instrument.
What PecuDesk covers
Four instruments in this group: Gold (XAU/USD), Nasdaq 100, Dow Jones and S&P 500.
Metal and energy futures contracts are covered in the futures lesson.
Key takeaways
- An index is a weighted basket with no earnings of its own and nothing to deliver.
- Weighting decides behaviour. Cap-weighted lets a few members carry the number; the Dow is weighted by share price.
- Breadth and the headline number come apart routinely. Read them separately.
- Derivatives trade while the cash market is shut, so the opening gap is repricing that already happened.
- Gold responds to real yields and confidence in currencies, not to earnings.
- The major indices are one exposure expressed three ways. Size them as one.
Common mistakes
- Reading an index move as broad participation without checking breadth.
- Holding all three major indices and counting them as diversification.
- Carrying a position size across instruments with different contract values.
- Treating an opening gap as a new move rather than as overnight repricing.