Gold miners beat all S&P 500 sectors in Q3 despite September selloff

Gold mining stocks delivered a 17.4% total return in the third quarter, outperforming every sector in the S&P 500 and the broader index itself, which returned 2.3%. This performance was achieved despite a sharp 6.3% decline in gold prices during September, a month marked by rising interest rates and a strengthening U.S. dollar.

Frank Holmes, CEO of U.S. Global Investors (NASDAQ:GROW), argues that the September selloff obscures a stronger outlook supported by central bank buying and sustained demand in Asia. He notes that gold miners remain undervalued despite improving cash flow and earnings. The NYSE Arca Gold Miners Index beat the energy sector, which gained 17.2% on higher oil prices, to top all S&P 500 sectors for the three months ended September 30.

The pressure on gold in September stemmed from macroeconomic shifts. On September 16, the Federal Reserve raised rates for the first time in over three years, while the 10-year Treasury yield crossed 5% for the second time since 2008. Real yields, defined as the 10-year Treasury yield after inflation, closed September at 2.93%, their highest level since November 2008. The U.S. Dollar Index also rose more than 2% in the month, increasing the cost of gold for overseas buyers.

However, Holmes points to structural demand that diverged from price movements. China’s central bank added more than 20 tonnes of gold in August, its largest monthly purchase since 2023, extending a buying streak to 22 months. China also imported a record 1,141 tonnes in the first eight months of the year. South Korea’s central bank plans to resume buying in December, its first purchase since 2013.

Investor conviction remained firm through exchange-traded funds. U.S.-listed physical gold ETFs attracted $3.8 billion in September, following $7.9 billion in August. ETF holdings reached approximately 100.9 million ounces, a one-year high, even as the gold price slipped from around $4,650 to $4,157 per ounce in late August.

Miners have outperformed the metal itself over the long term. The NYSE Arca Gold Miners Index has returned about 240% over the past five years, compared with about 137% for gold prices. Jeff Clark of Paydirt Prospector states the sector’s earnings yield is about 12%, the highest of any sector. Free cash flow per share for miners has grown tenfold since 2020.

Despite these fundamentals, mining stocks represent roughly 2% of global stock markets, their smallest share in 55 years. The combined value of the world’s 50 largest gold miners is less than Nvidia alone. Industry consolidation is accelerating, including a rejected $27 billion offer for Northern Star.

Holmes recommends a portfolio allocation of 10% to gold, split evenly between physical bullion and high-quality mining stocks. He notes that historical patterns suggest October through January is typically a strong period for gold, aligning with peak buying seasons in China and India.