The base of any portfolio of precious metals has to be exposure to the physical metals themselves.
Gold and silver are the usual choices but palladium, platinum and even uranium could also be considered.
Taking physical delivery of precious metals is probably best avoided as they are an obvious security risk and rather heavy to store.
Consider opening an account with the Perth Mint which is 100% owned and guaranteed by the Western Australian Government. This can be highly cost effective as unallocated bullion does not even have a storage charge.
Otherwise there are the Exchange Traded Funds (ETFs) for the precious metals such as GLD for gold and SLV for silver which can be bought and traded instantly on any internet brokerage platform such as Internaxx or ETrade.
ETFs work out slightly more expensive than the Perth Mint and some gold bugs have doubts about whether they could handle big swings in prices but these fears are likely unfounded.
Stocks v metal rates
However, to achieve better performance most investors also buy the shares of precious metal producers.
It has not been the case over the past 18 months but generally precious metal stocks out-perform the actual metal, the point being that producer costs remain static so increases in the metal price go straight to the bottom line for producers.
Unfortunately the inflation of mining costs over the past couple of years has tended to undermine this formula and precious shares have under-performed advances in the metal prices.
Analysts generally feel that this has now been overdone and stocks are ready to resume their usual out-performance in the next leg of the gold bull market, back above $1,000 an ounce again.
There are well over 1,000 gold and silver stocks to choose from, ranging from the giants like Gold Fields and Newmont and big silver producers like Hecla and Pan American Silver right down to the junior explorer companies with market capitalisations under $20m.
Earlier articles in this column have highlighted some stock picks by the most famous analysts and this is a good place to start a portfolio.
One tip to improve performance, albeit at some increased risk of loss, is to overweight silver stocks and junior explorers. The rationale for pure silver plays, as they are known, is that silver may repeat its past out-performance of gold by as much as three times, leaving silver stocks to show even higher levels of performance.
For the junior explorers there is the special argument that these companies will show the best percentage gains in the late stages of a bull market for precious metals as they did from 1978-80.
The juniors own the claims to the mineral rights on land for prospecting for new discoveries, and such land rises exponentially in value as a bull market progresses just like land does in a real estate boom. These stocks could therefore show huge gains.
However, junior explorers are also the riskiest class of precious metal investments and should be approached with due diligence through specialist websites like www.goldseek.com and www.golddrivers.com.
One approach is to buy a basket of juniors but keep them to less than 10%-20% of a balance precious metal portfolio. They are still cheap at the moment but rumours of a coming consolidation could quickly bring that to an end.