Exchange traded fund investors interested in the gold markets can consider gold and gold mining equities, which benefit from higher metal prices, and historically move in the opposite direction of broader equity markets.
In a recent webcast, Prepare for the Post-Pandemic World with Gold, Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, outlined the current bullish gold market, with gold bullion prices recently breaking above $2,000 per ounce for the first time since September 2011.
This recent run-up is not a one-off deal. Gold has also been a long-term source of returns for investors. Over the past two decades, the average annual gold price has been positive 80% of the time, or gold prices have only fallen in four of the past twenty years. Since 2000, the gold price per ounce jumped 522%, compared to the 111% gain in the S&P 500.
Holmes highlighted two significant trends that could support the gold outlook, including the “fear” trade and the “love” trade. On the so-called love side, we are seeing increased demand from both domestic and international buyers, notably emerging market consumers in the quickly growing China and India markets. The growing middle class in emerging markets exhibit a penchant for gold demand as a safety play and for jewelry.
The precious metal has benefited from the fear trade as well, with ongoing risks driving increased demand for gold as a safety play. We have also witnessed government policy on both the monetary and fiscal side affect the outlook for gold prices as traders try to hedge against potential inflation risks or a weakening U.S. dollar.
We are already witnessing major market players picking up gold as a simple way to diversify a traditional portfolio of stocks and bonds to diminish downside risks and potentially enhance returns. For instance, Sam Zell bought gold for the first time in January 2019. Paul Tudor Jones said gold is his favorite trade for the next one to two years in June 2019. Ray Dalio stated that gold would be a top investment at Bridgewater in July 2019.
Along with direct gold exposure, investors can consider gold miners and sector-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.
Among gold plays, royalty companies may stand out. 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. Additionally, they generate some of the highest revenue per employee of all public companies while growing cash flows and dividends.
GOAU includes a 30% tilt to royalty and streaming companies, which could help investors better manage common risks associated with traditional producers, such as building and maintaining mines, among others. The lower risk may also diminish risk since royalty companies have historically rewarded investors by increasing dividends at a faster pace than the broader equity market.
Financial advisors who are interested in learning more about gold can watch the webcast here on demand.