As of late October 2025, gold price has recently retreated by approximately 8% from its historical high, while the iShares S&P/TSX Global Gold Index ETF (TSX: XGD) experienced a steeper decline of 15% over the same period.
This pullback marks the most significant correction for gold in a year, yet it presents a unique opportunity for investors to gain exposure to the gold market through strategic portfolio allocation. Analysis suggests that constructing a balanced portfolio combining XGD and the Sprott Physical Gold Trust (TSX: PHYS) could be a rational approach for capturing gold’s long-term trend.
This recent gold price correction is primarily driven by technical profit-taking and short-term US dollar strength. However, the three core pillars supporting gold remain intact: continued buying by global central banks, the established interest rate downtrend, and persistent macroeconomic uncertainties. Many Wall Street institutions maintain their 2026 gold price forecasts, with bullish firms like Bank of America Securities still predicting gold will break through the $5,000 per ounce mark.
Notably, gold mining stocks have significantly underperformed physical gold. As an investment vehicle for a basket of global high-quality gold miners, the 15% drop in the XGD ETF has pushed its valuation into a relatively low range. This divergent performance creates a rare allocation window – when gold prices rebound, the leverage effect typically causes mining stocks to outperform physical gold.
As an exchange-traded fund, XGD’s components include global industry leaders like Barrick Gold and Newmont, offering three key advantages:
Operating Leverage Effect: A 1% rise in the gold price typically translates to a 2-3% increase in earnings per share for major miners.
Valuation Reversion Potential: The current P/E ratio is only about 12 times, below the industry’s historical average of 15 times.
Dividend Buffer: The average dividend yield of its constituents is 3.2%, providing a cushion during downturns.
Meanwhile, the Sprott Physical Gold Trust is backed by physical gold held in London vaults, offering a pure gold investment opportunity. This includes investors directly holding a proportional interest in the physical gold, a low correlation advantage with a 60-day correlation coefficient of just 0.18 against the S&P 500, and strong liquidity with average daily trading volume exceeding C$30 million on the Toronto Stock Exchange.
Based on different risk appetites, investors can consider the following allocation frameworks:
Defensive Allocation (Risk-Averse Investors): 70% PHYS, 30% XGD
Balanced Allocation (Moderate Risk Tolerance): 50/50 split to achieve a balance of defense and upside potential.
Aggressive Allocation (Risk-Seeking Investors): 70% XGD, 30% PHYS
Historical back-testing shows that a 50/50 portfolio achieved an annualized return of 14.3% across the last three gold cycles, with a maximum drawdown controlled within 18%, significantly outperforming single-asset allocations.
Currently, the short-term adjustment in the gold market provides a window for savvy investors to optimize their asset allocation. Through a combination of XGD and PHYS, investors can potentially capture the leveraged returns of mining stocks during a gold rebound while using physical gold to reduce portfolio volatility. Against the backdrop of rising AI bubble concerns and increased market volatility, this “balanced offensive and defensive” gold allocation strategy could become a crucial ballast for navigating market cycles.
