Allocate 20% to gold and silver, and miners offer the most upside – Sprott’s Schoffstall

NEW YORK (October 15) Investors would be wise to consider transitioning from the traditional 60/40 portfolio to a 60/20/20 one which includes a 20% allocation to gold and silver – and mining equities will likely have bigger upside within that 20% than the metals themselves, according to Steven Schoffstall, director of ETF product management at Sprott.

Schoffstall noted the massive inflows of investment that have been moving into precious metals ETFs this year as gold and silver have set multiple new all-time highs.

“Gold's always traditionally been viewed as a safe haven for economic turmoil, geopolitical instability, things that we're seeing right now, because it doesn't have a yield,” Schoffstall told CNBC’s Dominic Chu on Tuesday. “Generally, falling interest rates are beneficial for gold. That's when we see a lot of investors start to move into gold. So far this year, we've seen, on physical gold exchange-traded products, about $38 billion of investor flows going in.”

Schoffstall said that what's really happening now is a shift toward greater acceptance of gold. “Typically, it's been viewed as a fringe or outside metal and allocation tool,” he said. “What we're really starting to see is now more prominent economists are starting to suggest shifting from a 60/40 model to something closer to a 60/20/20 where it's 60% equities, 20% fixed income, 20% gold. Most people, we feel, are probably well-positioned if they have about a 5% to 15% allocation of physical gold, depending on their risk tolerance.”

“What you get out of gold is that hedging to the broader investor universe,” he added. “When you start thinking about things like correlations – how well does gold move versus other aspects of the economy – we tend to see low to moderate correlations across most major asset classes, and an inverse correlation to the U.S. dollar – all aspects of the economy that investors are starting to feel uneasy about at the moment.”

Schoffstall was asked if he still sees a great deal of upside for gold prices after the yellow metal’s recent run above $4,000 per ounce.

“We do think there's still significant room for gold to run,” he said. “I think today's a great view on that. We see the deal in the Middle East that hopefully can relay tensions down a little bit. Gold's higher this morning, over $4,100 an ounce as we're sitting here. We're seeing discussions about potential reciprocal tariffs as it relates to rare earth export restrictions coming out of China, and what that might do to elevate an already tenuous geopolitical realm that we have with China; that's pushing gold prices higher.”

“I don't think those overlaying macro factors are going away anytime soon, and I think that's something that investors are really latching on to.”

Schoffstall said that central bank buying is another significant factor pushing prices higher. “Over the last three years it's been about a thousand tons per year,” he noted. “We're still seeing continued buying from central banks. What that does is allow central banks to de-dollarize their assets. They can move out of Treasuries, move into gold, and at the same time they can actually repatriate that gold back to their home countries for their own self-storage. It gets it out of the way of sanctions that could potentially come from the United States or other countries.”

Asked how investors and their advisors could realistically ramp up their precious metals allocation to his suggested 20% when many hadn’t even tried to get to 5% in the past, Schoffstall offered several potential avenues.  

“Typically, what we see is that investors tend to be underallocated to gold, below that 5% allocation that we typically see from investors that have a significant portion of their portfolio [in it],” he said. “As it relates to gold and silver, there are other options where you can get some outsized returns by investing directly into mining equities. Gold miners, silver miners, they have operational leverage to the underlying price of gold or silver, which typically allows them to outperform over longer periods of time in bull markets.”

Schoffstall pointed out that 12 out of the 13 top-performing ETFs in the U.S. gold and silver miners. “They're far exceeding what we're seeing from the physical metals themselves,” he said. “That does go back to that operational leverage. But at the same time, as it relates to gold miners, we're not seeing significant investor movement into gold miners, even though they're returning 120%, 130% so far this year, which is about double of what we're seeing from physical gold. So we do think that there's opportunity for gold investment, either through physical or through the miners.”

Finally, he was asked what would convince him that the precious metals bull market run might be coming to an end.

“For gold, what it would take is to see some of that risk coming off the table, geopolitical, economic risk,” Schoffstall said. “I would think that in the near term, that seems quite unlikely. If you're looking at silver, [it’s] a little bit different with that industrial component. If you start to see slowdowns in AI investments or a slowdown in the global economy, you could see some pullback in silver prices. But in our view, silver has actually been underinvested in for so long that we think there's still considerable room to run for silver.”

“The main difference that we see between the two metals [is that] gold has central bank buying associated with it, silver doesn't have that underlying demand,” he concluded. “So expect a little more volatility with silver – even to the upside. That's one of the things that could potentially cause a pause in upward movements.”

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