Remember how 2018 was a lackluster year for gold? Then you’ll also remember that gold began to shine as the year came to a close when the stock market took a tumble. In fact, gold actually beat the market for the year. While the S&P 500 ended 2018 down 6.24 percent, gold was down only 1.55 percent.
So far in 2019 the yellow metal has been gaining momentum. For the fourth straight month in January, both the price of gold and gold mining stocks posted strong gains. As of February 26, gold was up for the month and up 9.94 percent in the last six months.
How Can Investors Participate in the Gold Space?
There are gold miners, physical gold, royalty companies, explorers and more. At U.S. Global Investors we advocate a 10 percent portfolio weighting in gold and gold-related securities – 5 percent in gold bullion or jewelry and the other 5 percent in gold mutual funds, ETFs or gold stocks. One of the best ways to gain exposure to gold, we believe, is by having exposure to gold royalty and streaming companies.
Royalty companies have historically outperformed all other categories of miners and the gold price from 2004 to 2018. Just look at the chart below using data from Paradigm Capital. They collectively delivered a 16 percent compound annual return, whereas the gold price saw a 10 percent return and both juniors and seniors were in the negative.
What Are Royalty and Streaming Companies?
These companies serve as specialized financiers that provide upfront capital to help fund producers’ exploration and production projects. In return, they receive royalties on whatever is produced or rights to a “stream.” A stream is an agreed-upon amount of gold, silver or other precious metal at a fixed, lower-than-market price. See this infographic for a complete visual explanation.
We consider these companies to be the “smart money” of the gold and precious metals space for a number of reasons.
Since they aren’t operating mines themselves, they aren’t responsible for huge infrastructure and operating costs. Royalty companies also hold highly diversified portfolios of mines and other assets, helping to mitigate concentration risk in the event that one of the properties stops producing precious metals. Lastly, these companies tend to have high revenue per employee, again, because they don’t incur the costs of running the mines themselves.
An ETF to Invest in the Space
That’s why we launched a gold ETF providing investors access to these companies – the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU). We know that precious metals is a crowded space with tough competition, but that’s why we made GOAU unique. Our fund stands out for placing such a strong emphasis on royalty and streaming companies – 30 percent of GOAU is composed of royalty names.
GOAU also invests in high-quality, well-managed producers that have a proven track record of sustainable profitability even when precious metal prices are down. The fund invests in companies with strong balance sheets and attractive portfolios of active mines, among other factors. Companies that reply primarily on debt to finance their business are eliminated from the index – the U.S. Global GO GOLD and Precious Metal Miners Index (GOAUX) – which uses a smart-factor rules-based model.
The ETF has been trading on the New York Stock Exchange since June 28, 2017. Since inception until February 25, GOAU has beaten a popular gold benchmark, the Philadelphia Stock Exchange Gold and Silver Index (XAU), which tracks 30 precious metal mining companies.
With the added potential benefits of royalty stocks, GOAU is able to be highly selective in the producers it invests in. Close to 90 percent of the portfolio consists of high-quality small or mid-cap stocks, screened for profitability, cash flow return on invested capital (CFROIC) and other intelligent factors.
Learn more about investing in GOAU by visiting the fund page where you can access performance, the factsheet, a video from our CEO and more!
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Philadelphia Stock Exchange Gold and Silver Index is a capitalization-weighted index composed of companies involved in the gold or silver mining industry. Cash Flow Return on Invested Capital (CFROIC) is defined as consolidated cash flow from operating activities minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities.
Diversification does not guarantee a profit or protect from loss in a declining market.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by clicking here.