Gold and gold mining stocks have historically been sought by investors as a defensive play during times of economic uncertainty, one of the biggest reasons being that these assets have had a low to negative correlation to the broader equities market. For the 40-year period through May 9, 2023, the correlation between the S&P 500 and the Philadelphia Gold and Silver Index was negative 0.01, suggesting that the two have moved in opposite directions.
As for when we might see a recession, the economic data continues to be mixed. On the one hand, employment remains strong in the U.S. with a consensus-beating 253,000 new jobs created in April.
This data point is historical, however, and if we look at leading indicators, a fuller picture of the U.S. economy’s health begins to take shape.
Since 1973, the National Federation of Independent Business (NFIB) has been polling small businesses on their outlook on the U.S. economy and business conditions in general. In April, the NFIB’s Optimism Index sank to 89, the lowest reading in a decade and, as the organization points out, the 16th straight month below the 49-year average of 98.
When asked if the next three months were a good time to expand, only 3% of small businesses said yes in April—meaning 97%, or nearly all, said no. This is slightly up from 2% in March, but on a three-month moving average, the reading is 3.7%. That’s the lowest point since March 2009, when the S&P 500 bottomed during the financial crisis.
Small Businesses as a Leading Indicator
It’s worth pointing out how important small businesses are to the U.S. economy. Huge multinational corporations like Apple and Amazon may get all of the headlines, but I believe small businesses are the real backbone of America.
Loosely defined as those with fewer than 500 employees, these companies represent 99.9% of all firms in the U.S., according to the U.S. Small Business Administration (SBA). They collectively employ 61.7 million Americans as of March, or 46.4% of the workforce, and are responsible for 43.5% of the country’s $26 trillion economy.
In other words, when only 3% of small businesses say the conditions are right to expand, it may be time for investors to diversify with assets that have shown a low to negative correlation to the market. I believe gold and gold equities could be an attractive option.
Diversifying with Gold Royalty Companies
During an economic recession, gold mining stocks can potentially benefit from increased demand for gold as a safe-haven asset. However, their performance depends on factors such as the company’s management, operational efficiency, production costs and the overall health of the mining industry. It’s also worth remembering that gold mining stocks are still equities and can still be affected by broader stock market trends.
That’s why we prefer to focus on high-quality, well-managed companies, which can be an important factor in mitigating risks while also potentially benefiting from their stock performance.
Among our favorites are gold royalty and streaming companies, the largest of which are Franco-Nevada, Wheaton Precious Metals and Royal Gold. As a quick reminder, these companies lend upfront capital to producers and explorers in exchange for either a share of the metal sales (royalty) or a share of the metal itself (stream).
We consider these firms to be the “smart money” of the gold mining industry because they have a history of strong management and operational efficiency. They’ve taken on little to no debt and have allocated their capital wisely, building their stable of active mines across the globe.
You can see the results for yourself below. For the three-, five- and 10-year periods through the end of April, Franco-Nevada, Wheaton Precious Metals and Royal Gold have beaten the price of gold bullion and the NYSE Arca Gold Miners Index on an annualized basis.
It’s for this reason that we made these three companies the top holdings in the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU). Driven by high-quality mining companies like Franco-Nevada, Wheaton and Royal Gold, GOAU has performed well so far in 2023, outperforming the NYSE Arca Gold Miners Index, S&P 500 and the price of gold.
Click here to see the top holdings in GOAU.
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Obtain a prospectus for GOAU here. Past performance does not guarantee future results.
Total Annualized Returns as of 03/31/2023:
| Fund | One-Year | Five-Year | Ten-Year | Since Inception | Gross Expense Ratio |
| U.S. Global GO GOLD and Precious Metal Miners ETF NAV | -14.26% | -9.88% | n/a | -3.04% (6/27/2017) | 0.60% |
| U.S. Global GO GOLD and Precious Metal Miners ETF Share Price | -14.38% | -9.91% | n/a | -3.05% (6/27/2017) | 0.60% |
| NYSE Arca Gold Miners Index | -13.65% | 10.12% | 0.04% | 1.02% (6/16/2006) | n/a |
| S&P 500 Index | -9.17% | 11.15% | 12.21% | n/a | n/a |
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. Short term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. For GOAU performance data current to the most recent month-end please visit www.usglobaletfs.com.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Distributed by Quasar Distributors, LLC. U.S. Global Investors is the investment adviser to GOAU.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds.
The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political, or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The Philadelphia Stock Exchange Gold and Silver Index is a capitalization-weighted index which includes the leading companies involved in the mining of gold and silver. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation’s private workforce. Correlation in finance is a measure of the relationship between the returns of two or more assets or investments. Correlation is expressed on a scale of -1 to +1, where -1 indicates a perfect negative correlation, +1 indicates a perfect positive correlation, and 0 indicates no correlation.