As investors consider ways to enhance an investment portfolio, many are looking to the potential benefits of holding a gold-related ETF and how it can fit into a diversified portfolio.
In the recent webcast, Outlook for Gold: What’s Ahead for 2020, Dr. Martin Murenbeeld, President, Murenbeeld & Co., outlined various bullish factors that can continue to support the gold market outlook, including an overvalued U.S. dollar, rising global debt that could limit future policy options, ongoing geopolitical risks that aren’t going away, continued demand for physical gold among global central banks and contracting supplies out of the miners sector.
The U.S. dollar has appreciated against global currencies, but Murenbeeld argued that the U.S. dollar will inevitably decline again or follow the fate of “reserve” currencies.
Murenbeeld underscored an ongoing global debt crisis that is continuing to build, with total debt for many countries hovering well above 250% of GDP, and because GDP growth declines when debt levels are this high, economic policy options become very limited. The government can continue with reflationary policies like monetary easing, expansive fiscal spending, devaluation and financial repression, which contribute to gold prices. On the other hand, austerity measures like cutting entitlements and raising taxes, along with accepting deflation or depression, will drag on gold.
Ongoing global risks will continue to support gold as a safe-haven asset. Geopolitical crises do not tend to have a lasting impact on the gold price, but some, like the 1979 Iranian Hostage Crisis had a significant impact, which caused the gold price to double.
Further adding to demand side fundamentals, central banks are buying more gold and will continue to raise gold stores to stabilize their domestic currencies or de-dollarize their financial systems.
Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, also highlighted ongoing supply side issues that contribute to favorable fundamentals in the gold markets. For example, the number of mining companies listed on both the Canadian benchmark TSX and TSX-V indices have been steadily declining since 2012. There were 212 companies on the TSX and 926 on the TSX-V in 2019, compared to 364 on the TSX and 1,309 on the TSX-V in 2012.
Mining companies are also spending less to explore new gold veins. Among Canadian miners in 2019, junior miners spent CAD$1,200 and senior miners spent CAD$961 on exploration budgets, compared to CAD$2,049 for juniors in and $2,178 for seniors in 2011.
The gold miner space may also be a cheap value play for investors seeking to capitalize on the rise in gold markets. Holmes pointed out that when comparing the S&P to TSX Global Gold, the valuation between the two have been trading in undervalued ratios since 2016.
“Gold mining stocks are incredibly undervalued relative to broader equities,” Holmes said.
As a way for investors gain exposure to gold miners sector, one can look to related ETFs like the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEArca: GOAU), 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.
U.S. Global believes royalty companies are a superior way to target the gold mining segment. Royalty companies are not responsible for costly infrastructure so huge operating expenses can be avoided. These companies hold highly diversified portfolios of mines and other assets to mitigate concentration. They generate some of the highest revenue per employee of all public companies while growing cash flows and dividends – royalty companies’ dividend rates have been growing 14% over the five-year period ended June 2019, compared to a 8% rate for the S&P 500. Furthermore, gross profit margins are three times higher than the broader miner industry.
Financial advisors who are interested in learning more about the gold market can watch the webcast here on demand.