In a recent interview, Wealth Advisor Managing Editor Scott Martin spoke with Frank Holmes, CEO and CIO of U.S. Global Investors (Nasdaq: GROW), to discuss the current state of the gold market and the appeal of the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSE: GOAU), an exchange-traded fund (ETF) for investors interested in gaining exposure to this area of the market.
Holmes provides a comprehensive analysis of the macroeconomic and geopolitical factors influencing gold prices, highlights the unique demand dynamics in countries such as China and India, and emphasizes the strategic importance of investing in gold mining stocks.
He begins by outlining the macroeconomic landscape, noting that 2024 is an unprecedented election year, with 70% of the world’s population—approximately 5 billion people—electing new leaders. This global political shift, coupled with significant monetary stimulus efforts, influences the overall gold market. Holmes emphasizes that government policies are critical precursors to economic change, and U.S. Global Investors closely monitors the Group of 20 countries’ leading economic indicators to gauge these trends.
Ongoing geopolitical strife and its impact on gold is a key consideration as well. Holmes calls attention to the record number of global conflicts in the past year and the attempts by countries such as China and Russia, along with the BRICS nations, to create a currency system independent of the U.S. dollar. This move is driving central banks worldwide to increase their gold reserves as a hedge against currency volatility and geopolitical instability.
Traditionally, the expanding global economy can signal a shift from fear-driven to love-driven demand for gold, emphasizing luxury and jewelry purchases. However, political uncertainties and the impact of money printing during election years are significant factors influencing gold prices.
Central banks’ excessive money printing is one of the most significant factors affecting gold. Holmes points out that the U.S. is spending a trillion dollars every three months to expand its monetary base. Such expansion is a global phenomenon. The resulting inflationary pressures and potential devaluation of fiat currencies make gold an attractive asset for preserving wealth.
He also mentions the influence of modern monetary theory (MMT) on economic policies. MMT advocates for increased government spending financed by money creation, arguing that inflation can be controlled through taxation and other measures. However, Holmes cautions that excessive money printing could lead to severe economic repercussions, making gold a critical asset for hedging against these risks.
Each economic downturn requires exponentially more monetary stimulus to reverse, creating a cycle of increasing money printing that supports higher gold prices, he notes. This escalating approach to economic stimulus underscores the importance of holding gold as a hedge.
Holmes also discusses the importance of the Purchasing Managers’ Index (PMI) as a leading economic indicator. The PMI measures the health of the manufacturing sector, and a rising PMI typically signals economic expansion, which can positively impact commodity prices, including gold.
The recent rally in oil prices is not solely because of geopolitical factors, Holmes notes, but is also linked to a recovery in global PMI readings. As the manufacturing sector improves, demand for industrial metals and energy increases, supporting higher commodity prices. This trend is bullish for gold and other precious metals, as they benefit from both their monetary and industrial uses.
Significant cultural affinity for gold in countries such as China and India also has had an impact on the market. Holmes refers to this phenomenon as the “Love Trade,” where gold is purchased not only as an investment but also for cultural and traditional reasons. For instance, gold is commonly given as gifts during weddings and festivals in these countries.
This cultural demand is substantial. Holmes shares an intriguing insight from Costco, which reported selling $100 million worth of gold in a single month, primarily to professional women of Indian and Chinese descent. This demographic’s purchasing power drives retail consumption of gold, further supporting the metal’s price.
On the investing side, Holmes advocates for a diversified approach that includes both physical gold and gold stocks. Gold stocks, particularly those with superior business models such as royalty companies, offer significant leverage to rising gold prices.
Royalty companies, which enjoy high free cash flow and margins, typically have a small number of highly skilled engineers and geologists who vet mining projects and negotiate royalty agreements, he says. This model allows them to generate substantial revenue with minimal operational risks.
Considering the practical considerations of investing in physical gold to be stored in a vault, Holmes recommends a “10% Golden Rule,” allocating 10% of a portfolio to gold, split evenly between physical gold and gold miners and related entities.
Focusing on the stock allocation, the U.S. Global Investors GOAU ETF offers a superior investment vehicle for those looking to gain exposure to gold names. The ETF employs a multifactor strategy, known as Smart Beta 2.0, to select and rebalance its holdings. This approach involves rigorous analysis of revenue momentum, deep value, and superior business models, among other considerations.
GOAU’s strategy is designed to outperform traditional market-cap-weighted gold funds such as the GDX and GDXJ. Holmes explains that GOAU’s portfolio construction involves detailed regressional studies and quarterly rebalancing to ensure that only the highest-performing stocks are included. This active management approach results in significant outperformance compared to its peers.
The concentrated yet diversified structure of GOAU includes about 25% of the portfolio in royalty companies, Holmes says, ensuring that it is not overly skewed. The fund’s success is a result of its rigorous back-testing and adherence to a multifactor investment strategy, which allows investors to benefit from different aspects of the gold market within one fund and has proven effective over the past decade.
Delving deeper into the specifics of selecting gold stocks, he explains that the performance of gold stocks can vary significantly based on management quality and business models. For example, poorly managed companies with inefficient operations often underperform. In contrast, well-managed companies with robust business models, such as royalty companies, tend to deliver superior returns.
Holmes shares insights from his extensive research and data analysis. He finds that gold stocks with revenue growth exceeding the price increase of gold typically outperform. Quantitative investors who focus on revenue momentum, rather than traditional gold fund managers, favor this data-driven approach.
He cites Franco-Nevada as a prime example of a successful royalty company. With high revenue per employee compared to traditional miners, Franco-Nevada exemplifies the efficiency and profitability of the royalty company model. This approach, according to Holmes, is far superior because of its lower operational risks and higher returns on invested capital.
Royalty companies are highly disciplined in their financial management, Holmes adds. Unlike traditional mining companies that often dilute their stock, royalty companies such as Franco-Nevada and Wheaton Precious Metals maintain high revenue per employee and substantial free cash flow. This disciplined approach is key to their long-term success.
Gold has outperformed the S&P 500 by 50% over the past 24 years, Holmes says, making it a compelling asset class for investors. Owning gold and quality gold stocks can be a prudent investment strategy.
But even beyond consideration of the factors driving the gold market today—geopolitical events, extensive money printing, macroeconomic and cultural demand in key markets—positioning portfolios to benefit from investments in that market requires thoughtful stock selection. That’s where GOAU ETF comes in.
GOAU ETF provides exposure to a carefully selected basket of gold stocks. The fund’s quantitative approach incorporates factors such as revenue momentum and revenue change relative to the price of gold. By combining a smart beta strategy with the royalty company model, GOAU aims to deliver enhanced returns for investors.
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