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If there’s one thing markets seem to agree on as we head into the close of the second quarter, it's that precious metals are on the way up. Nobody is certain about what the Federal Reserve plans to do next in the US. There is no foreseeable letup of disappointing data out of both China and Europe. The UK could leave the EU near term, and the implications of this remain very much unclear. All this uncertainty translates to a risk-off sentiment, and risk-off sentiment fuels capital flow towards safe haven assets. There are a number of ways to play this fundamentally driven precious metals trend, and they aren’t just limited to large miners/producers.

Here are three different types of small cap exposure, each with a different risk profile, that could be rewarding allocations going forward.

Exchange Traded Funds - Global X Explorers and MV Junior Gold

ETFs can be a simple way to diversify across a range of companies in a particular space, and the small cap gold space is no different. The two primary ETFs in the sector are Global X Funds (GLDX) and Market Vectors Junior Gold Miners ETF (GDXJ). The former focuses on gold explorers. That is, companies who seek out unmined deposits, and undertake drilling programs, with the goal of proving resources. The latter combines both exploration juniors and small cap mining companies that are already producing gold.

Within the ETF subsector, therefore, there’s even further risk diversification available. The Global X allocation is the riskier of the two funds, since its constituent companies have no guarantee of revenue generation. The companies that make up the fund have an average market capitalization of circa $500 million, and so while the fund is a little riskier than its Market Vectors counterpart, the potential upside on the explorers is larger. Why? Because markets have already priced in the resources for the producers that make up the Market Vectors fund. Since they remain unproven for the companies in the Global X fund, resources are yet to be priced in, and therein lies the upside potential.

To summarize – both Global X Explorers and MV Junior Gold offer a relatively low risk exposure to the junior gold space, with the former the higher risk, higher reward out of the two.

Junior Miners

A direct exposure is a risky allocation, but has a large potential upside if a position is taken before production starts. A good example at right now is Pilot Gold Inc (TSE:PLG)(PLGTF). Pilot has three primary properties – two in the US and one in Turkey. Its strategy is to identify what in the industry are referred to as sweet spots – regions that are underexplored or as yet unexplored, which lie close to proven resources.

Its two US-based projects are located in Nevada and Utah - Kinsley and Goldstrike respectively - just off the Eastern Great Basin shelf. This latter mentioned shelf has produced a number of successful mines, including Bald Mountain, which is owned and operated by Franco Nevada Corp (NYSE:FNV) and has produced more than 10 million ounces of gold to date, and Newmont Mining Corp’s (NYSE:NEM) Long Canyon, which has produced more than 3 million ounces to date.

The Turkey-based projects include two resources, one called Halilaga and the other TV Tower. These are part owned properties with a history of production, and are located in one of the mist historically rewarding gold regions in Turkey.

The reason Pilot Gold is attractive is its timeframe – the company is set to announce resource estimates from its two US projects before the end of the year, and this should help to cement a market value going forward. Aggressive drilling programs in both Nevada and Utah have already showed some positive deposit results, and if the company can build on these before the close of the year, it should have plenty of upside potential.

Of course, this is a risky exposure. It’s direct, and in an as-yet not producing company. The above mentioned explorer ETF includes a host of these sorts of companies, and as such, would probably be a better option for an investor looking for a risk mitigated exposure to exploration. As a small scale speculative allocation, however, it might be worth considering.

To summarize – miners offer a direct exposure to junior gold, but companies that are not yet producing are inherently risky. Pilot is one of the lower risk options in the space, however, based on its low cost path to production and the location of its exploration projects.

Gold Royalty Streaming

When miners need capital, they turn to gold royalty streaming companies. These companies act as a sort of financial services company for the gold industry. They offer capital for exploration, development and production costs in return for financial reward later down the line. This primarily involves either a percentage royalty on the gold produced as a result of their capital injection, or an agreement that promises the royalty streaming company access to discount gold, at a fixed price, as and when it is produced.

In the large cap space, the above mentioned Franco Nevada, and Silver Wheaton Corp. (USA) (NYSE:SLW) are the leaders in gold and silver royalty streaming respectively. As a small cap allocation, however, a company called Preston Corp (OTC:PSNP) looks to be a potentially rewarding exposure.

The company operates under the name Preston Royalty, and targets the funding of both the exploration and the production side of junior mining. It’s targeting $100 million in annual royalty revenues by 2020, and seeks to return between 50-85% on every dollar it allocates to junior mining.

The company just signed its first major agreement with a Nevada based explorer, and expects to spend between $4-5 million to gain royalty streaming access to a resource that, at current prices, holds around $130 million of gold.

Looking at risk, PSNP is not dissimilar to the ETF exposure. That is, moving forward, its risk profile should align with that of both Global X Explorers and MV Junior Gold. Why? Because the more companies it funds, the wider its diversification. As things stand, however, it’s closer to a direct miner allocation than it is an ETF, based on its single-company option. It’s market capitalization reflects this, and offers plenty of upside as the company matures.

To summarize – gold royalty streaming companies offer a similar risk profile to that of an ETF, albeit with their reward (and in turn, upside potential) deriving from different sources. Preston Royalty is a young company, and as such is relatively high risk when compared to some of its gold streaming peers. Its market capitalization is low, however, and as it buys options in more and more companies, should shift to reflect the overall reduction in risk that comes with this increase in options.