A mini-portfolio in gold

A mini-portfolio in gold

Diversify holdings and don’t overdo it


Gold has always been seen as a safe haven investment in times of market turmoil. It’s no different this time around.

The price of the yellow metal broke through US$2,000 in July. As of July 30, the price was up 29% year-to-date, a much stronger performance than any of the major stock indexes, including the Nasdaq Composite.

I recommend a gold weighting of 5%-10% in portfolios at this time. But one reader wants to go even farther. Dale W. wrote, “With gold rising, and equities uncertain, what holdings would you recommend for building a mini-portfolio focused on gold? We already own some FNV (Franco-Nevada) shares.”

It’s a good question. In fact, there are several ways to own gold and other precious metals, thus providing some degree of diversification. In all cases, however, fluctuations in the gold price will affect valuations.

Franco-Nevada Corp. (TSX: FNV) is a good start. It’s a gold streaming company, meaning it does not own any mines but rather purchases a share of the income from producers. In effect, it provides financing in exchange for a percentage of revenue – think of it as a type of mining bank.

For example, the company recently announced it has invested US$100 million for a 1% net smelter royalty from SolGold PLC with reference to all minerals produced from the Alpala copper-gold project in northern Ecuador.

Franco-Nevada stock is up about 58% year-to-date to July 30. With FNV as a starting point, I suggest four additional options for your mini-portfolio.

A gold miner

You want a company that owns high-grade producing mines. Don’t invest in exploration companies or start-ups – there’s no point taking more risk than you need to.

As of July 30, the S&P/TSX Global Gold Index, which covers the broad precious metals industry, was up 48% so far this year. However, there’s a wide variation in performance among individual companies. For example, major producer Agnico Eagle Mines Ltd. (TSX: AEM) is up 27% for the year to date. But Barrick Gold Corp. (TSX: ABX) has gained 58% per cent during the same period.

There are a variety of reasons why one mining company will outperform or underperform at any given time. For example, Agnico Eagle reported that seven of its eight mines were operating at significantly reduced activity levels in the first quarter because of the impact of COVID-19. Barrick, on the other hand, said first-quarter disruptions were minimal and reported gold production and costs were consistent with guidance.

Between these two, Barrick would be the preferred choice right now for this portion of a gold portfolio. The stock pays a quarterly dividend of US$0.07 per share to yield 0.6%.

Whichever gold miner you select, do some research. See how the shares have performed this year, examine the financials, and read what the company has said about the impact of COVID-19 on its business.

A gold-mining ETF

If you want to cover the broad universe of gold producers and streaming companies, put a portion of your money into the iShares S&P/TSX Global Gold Index ETF (TSX: XGD). It tracks the performance of the index of the same name. Holdings include some of the world’s top gold producers/streamers including Newmont, Barrick, Franco-Nevada, Wheaten Precious Metals, and Agnico Eagle. It’s ahead 48% year to date to July 30.

You could also consider the Harvest Global Gold Giants Index ETF (TSX: HGGG), which is ahead almost 54% this year.

A bullion-based ETF

In this case, you are not investing in a portfolio of mining companies but in the metal itself. The world’s biggest ETF of this type is SPDR Gold Trust (NYSE: GLD), which invests exclusively in physical gold bullion. It has gained 29% so far in 2020, about the same as the price of gold itself. Fund expenses are 0.4%.

Covered call ETFs

Finally, there are two Canadian ETFs that invest in portfolios of gold and precious metals companies but add a kicker – the managers write covered call options to generate additional income. That makes them suitable for investors who need more cash flow.

The Horizons Enhanced Income Gold Producers ETF (TSX: HEP) has a year-to-date gain of 31% and a trailing 12-month yield of 4.7%.

The CI First Asset Gold+ Giants Covered Call ETF (TSX: CGXF) is ahead 28%year to date, but currently shows a higher trailing yield at 6.0%.

A blend of these securities would provide a diversified mix of gold-based assets. But don’t overload your portfolio with them. I believe gold will continue to track higher, as central banks continue to print money at an unprecedented rate, so owning some gold is prudent. Just remember, all things in moderation, especially these days.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

© 2020 by The Fund Library. All rights reserved.The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.