Gold miner ETFs are a timely equity strategy that could help financial advisors capture the ongoing strength in the hard asset.
On the recent webcast (available On Demand for CE Credit), 7 Fundamentals of Gold, Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors, helped explain why gold continues to capture investors’ attention, pointing to the fear trade and the love trade.
Specifically, the fear trade may include factors like uncertainty surrounding the Federal Reserve’s monetary policy outlook and the government’s fiscal policy changes. The love trade may reflect demand associated with cultural celebrations like Ramadan, the Indian wedding season, Diwali, Christmas and the Chinese New Year.
Beyond short-term swings and despite the recent weakness, gold has also exhibited long-term staying power as the precious metal has outperformed the broader equities market two to one since the turn of this century.
Given the recent weakness, Holmes argued that gold bullion is a bargain compared to the S&P 500 stocks, with the gold to S&P 500 ratio now trading near its median of 0.53 since the start of 2000. Additionally, Holmes pointed to gold mining as a particular bargain play compared to large-cap equities, with Philadelphia gold and silver index to S&P 500 index trading below its long-term trend.
Looking ahead, Holmes contended that there are seven major trends that could continue to support gold and gold miners ahead. For starters, household and government debt are at all time highs. Gold prices have traditionally tracked outstanding U.S. debt trends, so the recent slip in bullion prices may soon pick up its pace again. Meanwhile, many developed economies, notably those in Europe and Japan, continue to float around negative yielding debt, which makes hard assets like gold much more attractive to these overseas investors.
As the U.S. implements protectionist policies, Holmes believed that inflation could push higher and prompt greater demand for gold to hedge a deteriorating purchasing power – gold has traditionally advanced in periods of rising inflation. The annual consumer price recently advanced the most in six years.
While the U.S. markets exhibit high valuations after a multi-year run, gold miners found within the U.S. Global GO Gold and Precious Metal Miners Index exhibit cheaper valuations compared to the broader market and other more popular gold miner indices.
An aging bull market is also at more risk of a sudden turnaround. Following the most recent market crash, gold surged in the subsequent few years.
Looking at gold fundamentals, exploration budgets have collapsed and we may be seeing peak gold supplies. For example, Barrick Gold recently reported lowest quarterly output in 16 years.
Meanwhile, there is lingering geopolitical risks that may continue to drive risk-off events. Gold is already priced at a one-year high in Europe due to political uncertainty in Italy amid fears of an Italy break from the euro bloc.
Lastly, Holmes argued that unwinding of quantitative easing here and in Europe could also contribute to gold safe-haven demand.
As investors look to gold plays, consider a smart gold miner ETF like the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEArca: GOAU). GOAU is a smart beta offering that tracks a specialized or rules-based index to help hone in on quality players in the gold mining space. The underlying U.S. Global GO GOLD and Precious Metal Miners Index uses quantitative analysis to pick stocks, with a particular focus on royalty companies.
“Royalty companies serve as specialized financiers that provide upfront capital to help fund producers’ exploration and production projects. They receive royalties on what is produced or rights to a ‘stream,’ an agreed-upon amount of gold, silver or other precious metal at a fixed, lower-than-market price,” Holmes explained.
U.S. Global believes royalty companies are a superior way to target the gold mining segment because they offer more stable revenue and cash flow, show rising book value per share, have high revenue per employee and have low SG&A to revenue, which have contributed to the outperformance to gold bullion and the broader gold producer segment.
For example, Wheaton Precious Metals, which makes up 10.1% of GOAU’s underlying portfolio, has exhibited many of the attractive traits investors may find within a gold mining company. Randy Smallwood, CEO of Wheaton Precious Metals, explained how the company has a diversified portfolio of high quality assets across the globe and has capitalized on precious metals streaming.
Holmes showed that many of these royalty mining companies exhibit stronger fundamentals. These royalty companies have a greater revenue per employee model than other producers and hold little or no debt. The stronger fundamentals have also translated well into outperformance as GOAU’s portfolio has outpaced other popular gold miner ETF plays over the past year.
Financial advisors who are interested in learning more about the gold market can watch the webcast here on demand.