How to Construct a Gold Portfolio

Interesting timing as it looked like gold might have fallen off the shelf last week.  nonetheless, there are still countless numbers of people who want to invest in a gold-related portfolio but don’t know how. I am going to share with you a few ways to approach this, along with what I think are the risks of each approach.

Please note: I am going to outline the risks of each approach. Overall understand that the price of gold, a monetary commodity with limited industrial use, directly and enormously affects the volatility of the investment categories discussed below.

I will outline the following approaches and who might (emphasis on might) prefer each approach:

  1. conservative
  2. moderate
  3. aggressive
  4. barbell strategy


You’re going to laugh (or be disappointed) but the simple choice here might be just to own gold – either bullion or one of the gold bullion exchange traded funds (the choice between the two depends on your reasons for owning gold). Unless the market goes parabolic, there is a chance that the metal itself will continue to outperform many of the gold mining stocks and other gold-related investments on the market (whose performance has “sucked” to be truthful).

Gold (GLD) ETF vs Gold Mining Stocks (GDX) 5 year Chart (Source: Yahoo Finance)

Furthermore, the volatility of gold mining stocks could make the toughest investor sick to their stomach. A conservative portfolio might be enhanced by keeping a cash position (to go along with a “core” holding position) that can be used to buy gold on large sell-offs and sold on rallies. This “trading position” approach is a technique used by savvy pros to keep exposure up and risk down. Keeping a core + trading model relies on the assumption that gold will continue to rise long term.


Maybe you feel that owning gold stocks would be too risky for you. No doubt they can cause some heartburn. But if you want the upside participation of a real gold bull market, you may want more than just gold bullion with a trading position. Here’s where you

US Gold Eagle (Source: US Mint)

could consider a gold royalty company (or more than one) and prospect generators to add some leverage to a gold bullion position without some of the risks of mining.

Royalty companies earn royalties from the production of gold from mines that they funded early on in exchange for royalties. The risk reduction lies in the fact that the royalty company gets a percentage of gold sold from the mine without incurring risks of mining costs (royalty companies take profits like franchise fees, and they do not operate the mine). It is an (ideally) off the top revenue stream. These royalties can and will fluctuate with the price of gold (hence the leverage) but they avoid the effects of labor, energy and other inputs that cause the profits of mining companies to be oftentimes so variable. Not to mention the general difficulties that come with a mining process that considers 1-2 grams of gold per tonne of mining rock to be a decent grade!

Prospect generators (PG) can become royalty companies if their strategy is successful. PG’s invest in surveying geology and locating targets that look promising for mines. They then attempt to partner with companies who agree to pay for most or all of the surveying, developing and mining a project in exchange for an ownership stake. Furthermore, good PG’s often have multiple properties under review/development. And furthermore, if a project is successful, the PG not only has their ownership stake, but often a royalty of some type on the production.


An aggressive portfolio would seek to take advantage of the rise in the price of the metal with more exposure to leveraged instruments. An allocation to gold bullion, a trading position in gold, along with an allocation to royalty companies, prospect generators,  gold miners and a small allocation to junior gold miners. The junior allocation should be very small as these types of investments more closely resemble lottery tickets. However, the risk can be better managed if these positions are chosen with some screening (see below for resource on that).

Junior gold mining stocks vs the S&P 500 2 year chart (Source:Yahoo Finance)


A barbell portfolio would typically mean owning a big chunk of a conservative asset and a small piece of a highly leveraged investment. In a traditional stock and bond allocation, this could mean owning 90% bonds and 10% stock options for example. the advantage is that downside risk s very limited, usually to the small amount allocated to aggressive investments. However, I am going to throw a slight twist here and suggest a portfolio that is mostly bullion with a small allocation to well-screened prospect generators (along with the trading position).

Why this portfolio? I prefer* this approach myself because gold is easy to buy and sell, so it offers liquidity. It’s also much less volatile than gold mining stocks. However, we may not want to miss out on the upside of mining stocks if gold were to really take off. Prospect generators, with their lower risk model – remember they ideally don’t risk huge capital on exploration, mine development, mining and operations – and high payoff potential, could add substantial leverage to a gold portfolio without as much business risk. Being often smaller companies, their stocks may be volatile but their underlying businesses may not be!

Why the trading position?

Gold is such an emotional investment that a prudent trading position could be added. Gold behaves fairly well and for seasoned traders, it can produce profitable trades, or at least trades that are easy to set up and measure. Furthermore, the trading position could help shield an investor from the volatility of a large gold position and potentially enhance returns.

For further research:

Profiting from the Dismal State of Gold Miners, by Brent Cook – Brent is a geologist analyst who runs a newsletter ($1,800 per annum) where he discusses what he is doing with his money. Great knowledge. In fact, Brent’s entire website is a great resource for gold investors: Exploration Insights (hint – check out videos of Brent on Youtube, BNN etc – he often shares some of his specific ideas which might be educational for you)

The Mercenary Geologist – Mickey Fulp is another geologist investor who writes commentary on mining stocks. However his approach is slightly different from Cooks- Fulp gets paid oftentimes by the companies he profiles (and invests in) but his material is still very educational and his hard science background separates him (as it does Cook) from the many investment researchers out there with no scientific mining knowledge.

Paul van Eeden – Brent Cook’s old boss who manages money in the junior mining sector. His knowledge is deep and his successes are well-known. Go to his site and hunt videos and articles of his on the web.

Rick Rule – Rick is another successful long term investor in junior mining and resource stocks (not just gold). He is an investor with a deep knowledge of the industry and likes to buy resource stocks when they are completely out of favor – often squeezing warrants out of small companies desperate for cash. I have mentioned Rick on my site before, including his talk at the 2010 San Francisco Hard Assets Conference which I attended. Also catch him on Youtube, BNN etc.

These four and countless others have appeared numerous times on TV and in print educating and discussing the topic of gold and gold mining stocks. If you are interested in investing in this area, these four will give you a good primer. I must warn you however, that this sector, especially junior mining stocks, can be super risky. If you have the money, consider paying for professional advice in this area. Otherwise, you have been warned. It’s also dangerous to focus on one sector of the global markets when there are so many ways to invest. Be careful of mixing emotions with logic!

*Please don’t confuse my preferred approach as a recommendation. I’m just sharing what suits my personality and risk tolerance. You must find out what fits for YOU.