A Common Sense Approach to Picking Gold Miners

A lot of my early posts on this site were about gold (& silver) mining shares, covering which I owned or was looking at in the precious metals space (& why). Over the years I’ve had a number of people email, ask in person, direct message me (on Facebook/Twitter) about gold mining shares, asking for my advice on which miners they should buy, opinions on specific companies or whether it’s time to re-enter the market. My replies have remained relatively broad (& probably unhelpful), because I haven’t spent very much time researching or keeping track of companies in the precious metals space for around 4-5 years. I held some long term gold miner positions in my super (unfortunately given the price trend!) and in 2013/2015 I spent a little time looking at some options adding NST & SLR/MML. Thankfully the rise in these 3 has far more than made up for the losses in the others I hold.

I thought I would write a quick post on how I narrowed down and compared gold miners in the past (2009-2011), which will hopefully provide some ideas for those interested in the gold miner sector who want to take a punt. I am not a fund manager and have no experience in the mining industry, so most of the below is just a common sense approach I took as an individual investor. A lot of the below was simply learned along the way over several years speculating.

Suffice to say if you do not share my view that the price of gold is headed higher over the next couple of years, it would probably be a waste of time reading past this point. My view is that gold miners will provide leveraged exposure to a continuing secular (& new cyclical) bull market in the price of gold. If you think this is another false move or that the price of gold isn't likely to head much higher, then avoid owning gold mining stocks at all.

I am going to look at what are considered nano/micro-cap (capitalisation) stocks. This is the riskiest end of the market (but also the most potential for lucrative gains), so DYODD and don’t consider any companies I narrow it down to here as an invitation to buy. They should make up only a very small percentage of your portfolio. I don’t own any of the companies listed below, however may buy/sell any of them in the future at various times. I prefer researching this end of the market (<$200M market capitalisation) because their finances are often simpler, they have fewer projects and other moving parts which can make peer comparison easier. You can take a similar approach when comparing larger gold miners, but you probably won't need to dig as deep into the specifics (e.g. if they have a $100M in cash, you probably don’t need to be checking their cash burn rate to see if they have enough to last the next two quarters). To balance your exposure to gold mining companies you may choose a handful of companies in each size range, for example 6-12 nano/micro-cap companies (spread your risk!), 3-4 mid-cap and 1-2 large-cap miners.

Here is the basic agenda:

1. Find a list of gold miners

2. Narrow selection based on quantitative criteria

3. Narrow selection based on qualitative criteria

4. Choose the companies you will consider buying

5. Find a good entry point

6. (…)

7. Take profit (or cut your losses)

And here we go…

Find a list of gold miners

The list of gold miners you want to consider will depend on your situation. You may want to only consider those on your local stock exchange. You may only be able to consider those in the ASX300 if you are in Australia and looking to buy using a superannuation fund which allows direct share investment. As an Australian investor wanting to stick with those available on the ASX I find a Gold Nerds subscription an invaluable time saver and tool (you will see why later as we narrow the selection). If you want to compile your own spreadsheet (making it easier to compare the stocks) Gold Nerds handily has a list of the companies they cover on their website (see here) or try Mining Feeds / Junior Miners for broader lists which cover miners in other countries along with Australia (don’t rely on any list to be 100% complete or accurate).

Narrow selection based on quantitative criteria

Here is where having a spreadsheet like Gold Nerds or having created your own with the relevant information makes things easier. We can narrow down our list in a variety of ways, for example limiting those we look at by market cap, gold reserves or cash. Here is a quick list on what I will be using to narrow the selection of miners (using the Gold Nerds spreadsheet):

• Less than $25M market capitalisation (as above, looking for nano/micro-cap stocks)
• Cash holdings of more than $1M (looking for cash that will last for at least 2 quarters) 
• Market cap more than $2M (to avoid absolute bottom of the barrel stocks, probably best avoided) 
• Share price higher than .001 (to avoid companies whose shareholders may value it less, but can’t price that in)
• 75%+ in Gold (as opposed to having Gold as a side show to other minerals)

Here's how the list looks after the following factors are taken into account (narrowing a list of 200+ companies to 40):

Click Table to Enlarge

Keep in mind that some of these may change with regular updates. For example sorting based on market capitalisation, you may find that stocks fall into and out of your selection based on share price movement from one day to the next, so you may want to run these checks over a period of days or even weeks to ensure all relevant companies are captured. Another option is to use a buffer approach, for example instead of searching for companies with a market capitalisation under $25M, bump it up to $30-35M.

This isn’t an exhaustive list of quantitative comparisons you might consider. For example some other relevant data to check for:

• How many listed shares do they have? (low share price, high number of shares can be indicative of significant past dilution)
• How many listed and unlisted options do they have?
• If the company is producing, what is their cash costs (per ounce mined)? Total costs? Net profit? Earnings per share?
• What size is their JORC mineral resource? Ore reserve? What is the grade?
• How long will their cash last?

The relevant questions may depend on the stage of the company (explorer, developer or producer). In the nano/micro-cap space you won’t have many companies producing (or even nearly at that stage), so some of the above questions won’t be relevant.

Remember you are not trying to calculate the absolute best miner/explorer in your list, but typically a group of the best among their peers. So the measures you use here to narrow the field are more about ruling out the worst. 

Narrow selection based on qualitative criteria

This is probably the more difficult measure to narrow the selection. Quantitative data can be relatively easy to compare (e.g. Debt too high? Forget it. Not enough cash to fund the next quarter? Too risky.), but qualitative is where you need to review various aspects of the company where it may not be so easy to choose one over the other. Also you may need to review some of the quantitative findings in a qualitative manner.

For example, perhaps they have a high number of shares issued… many junior mining companies have had to issue a lot of shares over the past few years just to survive. Did they raise capital in a responsible manner (minimising dilution of existing shareholders where possible)? Did they provide an opportunity for all shareholders to take part (through a Share Purchase Plan)? Did institutional buyers retain their shares in the company or just flog them off (or still trying to sell them, creating a supply overhang which may keep the share price low)? If they have a low number of shares on issue, is that just because they’ve had a share consolidation recently?

Some of the numbers may not be directly comparable, for example a low-grade body of gold bearing ore close to the surface may be far more lucrative than a deep high-grade vein style deposit which can be costlier and more difficult to mine.

The easiest way to work through this review and selection process would be to come up with a set of questions that you think are important and work through them for each company. Some areas you may look at:

Management/Directors

• What relevant experience do they have? (Many small company directors are lawyers/accountants)
• How long have they been with the company? (Recent changes in management can be a warning signal)
• What are they being paid? (I typically prefer companies where exploration expenditure exceeds administration costs) 
• How many are there (relative to size of the company)? (Does a small cap company with 1 project need 6 directors?)
• Are they looking after the little guy? (SPPs instead of only institutional placements when raising capital)
• Are they marketing the company? (Investor presentations, conference appearances)
• Do they deliver what they say they will? (Time frames for drilling results or development milestones)
• Do they have a significant stake in the company? (If they aren’t prepared to invest their money, why invest yours?)

Mineral Resource/Ore Reserves

• Do they have a resource/reserve? Does it comply with the JORC code? (Some may use less reliable international measures)
• What is the grade of the resource? How does that grade compare with similar mine types which are currently producing?
• Is the resource spread over multiple deposits or in one location?
• Are resource upgrades expected?
• Is there a large enough resource/reserve to justify development? (Answer often lies in a mining feasibility study)
• How long has the company had the resource? (If the resource was defined 10 years ago is there any sign it will be developed?)
• Has the discovery cost of existing resource been justifiable? (May give indication of viability to extend resource/reserve)
• How many years’ worth of mining will their resource/reserve last?
• Is it likely current resources can be converted to reserves?
• What other minerals have been detected and of value if mining occurs? (e.g. Silver, lead, copper credits may offset production costs)

Cash/Finance

• How much cash do they have? (Check balance from quarterly report then add any $ from placements/minus estimated expenditure)
• What’s their rate of cash burn? How long will their cash last? (Less than 2 quarters and you’re at high risk of near term dilution)
• If they have a significant cash balance, what are their plans for it?
• Do they have any liabilities (loans)? Any outstanding accounts? Hedging?
• Do they have a financing facility which dilutes the share base? (Often a bad sign if a company resorts to this type of financing)
• If an advanced explorer how will they fund development/plant costs?

Exploration/Drilling Results

• What drilling results do they have due soon? (Which could be a catalyst to send the share price higher) 
• What is the grade, length, depth of past drilling results? Is it open along strike? (Could indicate more positive news to come)
• Are they funded for upcoming drilling programs?

Tenement/Project (Including History)

• Has the project got a history of mining? Was it successful? (Attempts may have been made by other companies to explore/mine the same project or deposit)
• Have any companies gone into administration mining the same project? What will the current company do avoid the same?
• Has the price of gold risen enough to consider the project viability again? (Despite any past failings)
• Does the company own 100% of each tenement/project or only part of? (May need to split profit or pay royalties)
• Where is the project located and does its geographical location pose substantial sovereign risk? (See KCN on the ASX)
• Is their tenement/project in a region known for gold exploration, development and production? (i.e. Supportive local government)
• Has there been any local protests or concerns raised in relation to the company or project?
• Are there underutilized plants nearby? (They may be able to truck ore to process it without incurring mine development costs themselves)

Production

• Are they meeting or exceeding projected targets? If not, why not?
• If they are exceeding targets, why? Is there room for further improvement along these lines?
• Are they returning dividends to shareholders? Is this in their best interest or would they get more value reinvesting into further exploration?

I can’t go through all the questions you need to be looking at (and they will change depending on the stage the company is at). For the most part it’s not about writing down the answer for each of these to compare with their peers, but instead being aware of this type of information to get an understanding of each company to rate and compare their overall quality.

Something else to consider is the liquidity of the company. Some of the small cap resource companies might be tightly held leaving only a small number that can be publicly traded, this can cause liquidity issues in the event you want to sell with large gaps up and down in price when it changes hands. An example of this is RND on the ASX:

Click Table to Enlarge

Not that companies like this aren't worth considering, but it's an additional risk to be aware of and given the choice between this and another gold miner you think will perform similarly as well, you're best to go with the one easiest to buy and sell.

Another method of research I can recommend is to visit online forums and read through the history of discussion on the companies you’re looking at. A good one for ASX listed companies is Hot Copper. You do need to be aware that many users on the site are posting there simply to ramp the company/ies they are holding at any particular time, but you can often get a feel for investor sentiment by reading the threads or discover potential problems (or even positive aspects) that you may have missed when performing the above due diligence.

Choose the companies you will consider buying

If you’ve been over the above and feel out of your depth, don’t worry. If you are new to the stock market or even new specifically to resource companies, then it’s a lot to think about and learn. If you feel uncomfortable selecting companies based on narrowing your selection above, then either keep your position size very small while you continue to learn or you could consider an index which will expose you to a variety of gold miners without needing to pick them specifically. I don’t believe there is any index on the ASX that will give you exposure to those which make up the XGD (S&P/ASX All Ordinaries Gold Index), however I was recently made aware there is a ticker on the ASX (GDX) which attempts to track the performance of the NYSE Arca Gold Miners Index (before fees/expenses), you can read more about the VanEck Vectors Gold Miners ETF here.

Assuming you have been able to narrow down your selection to a smaller number of companies that fit your criteria, you can put them all on to the watch list of your share trading platform (I would hope that you'd narrow down the example list of 40 above to around 10-20 max). From this point forward you just need to watch share price and any market updates provided through announcements which may affect your interest in buying them (for example they may end up outside of your criteria).

Find a good entry point

What do I mean by a good entry point? In my mind you don’t have to be a professional technical analysis trader to apply a common sense approach (or rules) when entering positions in the stocks you are watching. Don’t chase the price. Keep a cool head and don’t get emotional. You may be better off buying a breakout if the stock price has been crawling along at a low price for a period of time. I would recommend taking a look at the trading rules of Assad Tannous of Asenna Wealth published here (also follow him on Twitter, he presents a very cool, calm and collected approach to trading).

The share price of many gold miners has soared over the past 6 months. I expect they will continue to rise over the next couple of years along with the price of gold (hence interest in exposure to the sector), however that doesn’t mean there won’t be corrections along the way or even long boring flat periods. BTFD (Buy The F*cking Dip), don’t BTFP (Buy The F*cking Peak). Average in if you think it may go lower.

With a recent decline in the price of gold, gold mining stocks have taken a beating over the last couple of weeks with the XGD declining around 13% from it's recent peak and the RSI suggesting it's as oversold as other recent corrections (not to say that it can't be longer and deeper on this occasion):

Click Table to Enlarge

There's a chance that a reasonable BTFD opportunity is already upon us, but it's best to look at the charts of those in your watch list for the best opportunities.

(…)

This step is a reference to a South Park meme. In the episode the gnomes are stealing children’s underwear for the purpose of “profit” with no real plan. If you follow the above and below you most certainly do have a plan, so really it’s just a matter of waiting to see what happens at this point. Continue to monitor the companies you own (particularly for any  company announcements). If something of substance changes which has the potential to impact on price you may choose to sell and switch into another company that measures up.

Take profit (or cut your losses)

Through trial and error I have found this step is one of the most difficult, but you should always have an exit plan. My plan owning gold miners is to hold them as leveraged exposure to a rising gold price I expect to see in the years ahead. Chances are that any small mistakes will make a negligible difference (if you’ve spread your risk over multiple stocks) with most companies ‘rising with the tide’ and hopefully careful selection results in a few which will significantly outperform.

If you pick a company and unexpected news causes them to tank, consider selling and taking the hit rather than marrying yourself to a company and riding them into the dirt. A bad drill result or three may be worth holding through, but (for example) if you’re holding a company who has begun production where the grades expected are not being achieved through the mill, this can be a precursor to needing to revisit their ore reserves and mining profitability.

Taking profit is also important. As I said at the start, my view is to ride these companies as leverage to a rising gold price, so my time frame to hold may be years in some cases, but that doesn't mean it's not a good idea to take some profit off the table along the way.

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Good luck. I hope providing this structured approach to picking gold mining companies has been of benefit to you. Any commemts, suggestions or feedback (positive or constructive) is welcome in the comments section below. Would be particularly interested to know if any readers invested in this space have any of the stocks in the table above and if so their reasons for owning over peers...

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Gold Speculator, Investor, Trader, Saver or Gambler?

I recently had an interesting discussion with a few individuals in the comments section of a subscription site (so can’t provide a link) where we argued whether certain members were investing, speculating or trading (based on their strategy) in the precious metals sector.

The word speculator generally has some negative connotations, but I think many in the precious metals space who think they are investing are in fact speculating (myself included, but I’ve never had any issues with that label).

Here are the five labels I would give to those with capital invested in the precious metals space (more than one may apply to each individual):

Precious Metals Trader

The precious metals trader is someone looking for short term opportunity in the market based on chart and other technical indicators which suggest the future price direction of the metal. They might trade short or long on the metal (betting on the price moving lower or higher). They might have a view on the long term prospects for Gold/Silver, but this doesn’t (or at least it shouldn’t) affect their short term decisions. This means when the metals are overbought the trader will either sell short or close their long positions (some may follow the rule “Never short a bull market”).

Precious Metals Saver

The precious metals saver is a regular buyer of Gold &/or Silver. They buy the metals not to speculate on a rising price, but because they choose to hold their savings in ounces instead of dollars. Precious metal savers will generally not concern themselves with the price when they buy, rather they purchase at regular intervals (e.g. every pay day or once a month) and this is referred to as dollar cost averaging. In some cases they are doing so because they believe it will protect their capital from the effects of inflation or some save in Gold/Silver as they believe a new monetary system is likely in the near future and the savings in precious metals will allow them to safely carry their capital from the current monetary system to the next. The precious metals saver might be considered conservative even if they have heavy exposure to precious metals.

Precious Metals Speculator

The precious metals speculator is someone who is heavily exposed to precious metals with the intention of making spectacular gains as the bull market continues. They would have a solid understanding of the market and ensure the fundamentals support their decision. Their heavy exposure means that if something were to change dramatically in the market without warning this could impact the value of their portfolio substantially, a risk they are aware of and prepared for. Unlike the trader they may be prepared to weather significant price corrections with the intention of riding the longer term trend.

Precious Metals Gambler

The precious metals gambler is probably similar to the speculator in many ways; ultimately they are looking for a significant gain in their portfolio, but in attempting to achieve these gains they make poor decisions which might include: using too much leverage, blindly following the actions of a speculator without understanding reason for their choices or buying without knowing their own limits (for example they might buy high without the necessary patience to weather a long correction & sell out at the bottom).

Precious Metals Investor

The precious metals investor is someone who holds Gold/Silver as part of a balanced portfolio (for example they might hold 25% as per Harry Browne’s Permanent Portfolio, with the other 75% held in stocks, cash & bonds, evenly split). They will not be overweight in precious metals and their exposure is likely to be mixed, for example they might hold some physical along with dividend paying Gold & Silver mining stocks. If the goal of the individual is a modest and consistent return over a long period of time (of which the precious metals plays a part) then they are an investor. If they are using precious metals to multiply the value of their portfolio over the short to medium term, then chances are they are a precious metals speculator.

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Several of the above labels may overlap at times. For example the precious metals saver might occasionally trade some Silver for Gold (or visa versa) in order to play the Gold:Silver Ratio (GSR), but ultimately their goal would be to stack more ounces using this strategy (just the same as you might swap from one term deposit account to another with a better rate).

To a degree I would consider myself as having worn the first three hats (Trader, Saver & Speculator) at various times over the last five years.

I have a core position in physical Gold which is unlikely to be sold regardless of the prices we reach over the short to medium term. This core position will be held with the expectation we see a new monetary system at some point (perhaps something similar to Freegold, a concept previously covered on the blog or maybe it will be completely different). I would consider this core position as “savings”.

At times I have sought to benefit from short term moves in the price of Gold and Silver, including when I sold a portion of my Silver between $38 and $46 in early 2011 when I assumed we were nearing a major peak (but held the majority for continued bull market trend).

Primarily though I consider myself a precious metals speculator. I am heavily geared towards a continued rise in precious metals and it should be obvious to most longer term readers that the vehicles I’ve used can be inherently risky (for example junior mining stocks & options). My investment capital is positioned heavily (100% more or less) toward the expectation for a continued rise in the precious metals and while I think there is good reason to expect the bull market will continue, if the environment changes quickly and without warning (for example the US starts raising interest rates and tightening monetary policy) then there is the potential for significant loss.

The above descriptions and definitions are mine only. I have no doubt there are some whose opinion would clash with mine and I would encourage you to speak up in the comments below. Also if you think there is a group who hold precious metals but aren't covered by the above labels I would also value your input.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

BB.

 

Precious Metals (Gold/Silver) in Australia Exposed!

"Planning to invest in gold? This is what you need to know" was the title of a recent article from Channel 7's David Koch aka Kochie (a well known Australian financial commentator). One thing I found particularly amusing in Kochie's article was the disclaimer at the bottom:

"As always consult your financial advisor before galloping into any gold rush."

How many financial advisors would include self stored (e.g. personal safety deposit box) physical Gold or Silver in their suggested plan for you when they don't receive a commission from the purchase? If you plan to see a financial advisor about purchasing precious metals, find one who charges an hourly rate for his services rather than one who works on commission and make sure it's someone who is familiar with the different ways of getting exposure to Gold and Silver.

The last time I was reviewing my income protection (around 18 months ago now) I asked the financial planner about exposure to precious metals through their boutique firm and got a blank look. The closest they had was a mixed commodities fund.

While Kochie's article did go over a few key points, it was not really helpful for the novice at all (and was more or less a rehash of a very similar article 2 years ago). A much more in-depth guide I wrote last year for buying physical Gold and Silver can be found here (Gold and Silver Buyers Guide), but even this guide has it's limitations, it already assumes that the reader wants to take on the risks and responsibilities associated with owning physical.

The problem with either of the above linked guides (Kochie's brief overview or my guide to buying physical) is that they attempt to put the cart before the horse. Before buying precious metals you really need to have an idea of why you are buying and this will guide you toward the most suitable form of precious metals exposure.

What many people fail to realise is that there is a huge variety of different ways to gain exposure to Gold and Silver, just like property (residential, commercial, buy and hold, renovate, develop, real estate investment trusts, local or overseas purchase) or shares (technical trading, dividend investing, fundamental company analysis or buying an index). The variations are almost limitless when you consider that some people may choose to gain exposure in multiple ways and for multiple reasons.

Here are some questions you may need to ask yourself before jumping into precious metals:

Are you buying to preserve wealth or create it?

Do you consider Gold and Silver to be money or an asset?

Do you have a short or long time frame?

How often will you want to change your position?

How involved do you want to be in managing your exposure to precious metals?

What are your expectations on the value of the AUD relative to the USD?

What level of counter-party risk are you comfortable with?

And here are some of the aims of those who currently hold:

Used for wealth preservation over the long term (savings)

Tool to increase wealth relative to other assets (speculate on changing ratios)

Tool to increase wealth in ounces by trading the Gold:Silver Ratio (GSR)

Trading short term momentum or technical chart patterns for profit
An investment via purchase of profitable mining companies
Insurance to protect from complete currency collapse
A hedge against falling AUD (protect against systematic risk/shocks)

Below is a brief flow chart showing a majority of the ways that you can gain exposure to the precious metals bull market (in Australia). You can't rely on this chart alone to make a decision on which type of exposure is right for you, but hopefully it highlights the diversity of options available:

CLICK IMAGE FOR FULL SIZE

Precious metals are used by many different types of people, with different views, investing over different time frames and for different reasons, so trying to make a decision on which exposure is best for you can be difficult.

For someone who wants to trade the bull market purely on a technical basis and take short term profits, purchasing physical bullion is probably not the smartest move. In much the same way someone who is buying Gold and Silver in the expectation that they will replace fiat currency following the collapse of the current financial/monetary system is not going to be buying CFDs. Once you've given thought to your reasons and goals for buying precious metal, it usually becomes much easier to decide on the form you buy.

Some precious metal advocates will tell you physical is the only way to go, "If you don't hold it, you don't own it", to which there are varying degrees. For example some feel that physical is best kept in your personal possession, either stored at home or buried on your property. Others who advocate physical think that holding it in a personally organised safety deposit box poses a lesser risk than storing at home. Neither method it without it's risks (for example precious metals stored at home are are at risk of theft or could get damaged in a fire). It's a pretty disturbing thought, but if someone knows you store valuables at home they could threaten you or someone in your family with a weapon to get you to tell them where your stack is, even if buried).

It's not really a surprise that we see opinions like this:

Today gold is traded like a volatile commodity by gamblers who like to call themselves traders. Or else it is held as a small percentage of one's wealth for the expressed purpose of "insurance." Gold is actually a pretty poor inflation hedge as long as it is under external influences such as the inflatable supply of paper gold BB liabilities. So the only way it can even hope to perform as prescribed is as insurance in physical form only. Yet so many investors still hold "paper gold" as the insurance portion of their portfolio. This alone really highlights the confusion in Western "professional" investment thought.

Most people are savers, not investors or traders. Yet today we are all forced to be investors chasing a yield because there is no such thing as a perfect inflation hedge. If there were such a thing, a large portion of the "investing public" would not be anywhere near stocks and bonds. Even the most "risk free" bonds, US Treasuries, have the greatest risk of all, currency risk. And in the case of the dollar, this is exposure to a risk that, today, is well out of the hands of the currency manager thanks to seven decades of functioning as the global reserve standard. FOFOA

When we've seen events in recent history that look like this:

It's one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global. It's something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%.

That, in essence, is what's happening to investors whose bars of silver and gold were held through accounts with MF Global.

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold "warehouse receipts" to prove it—they'll have to forfeit 28% of the value. Barrons

The problem today is that any investment or form of savings has an element of risk. In a recent thread on Silver Stackers there was discussion around the difference between gambling and speculation and the following was an interesting take:

Gambling has a crucial difference with speculation: with gambling, there was no risk prior to the act of gambling, with speculation, there was. On the moment someone buys silver, he reacts on the risk of inflation. On the moment someone pulls the lever of a casino slot machine, he just created the risk. He can decide to not pull the lever, and just go away. Speculation is reacting and thus requires insight, gambling is just a random choice, and requires nothing. Pirocco on Silver Stackers

Someone who thinks their cash sitting in a bank account is safe might want to consider the fact they are at risk of their purchasing power diminishing as tax on interest and inflation resuts in a negative real return in some cases. Not to mention the risk of their bank going insolvent. 

While today Australian ADI's are protected by a limited government guarantee, there are still many places that people can park their cash not realising the risk they assume by putting their money in these funds (some perhaps not realising they are not covered by the government guarantee):

The collapse of major mortgage fund Banksia Securities was exacerbated by an apparent failure to adequately account for almost $200 million in overdue loans and repossessed properties.

Banksia, based in Bendigo, was swept into receivership on Thursday night holding $650m on behalf of about 3000 investors, many of them retirees.

The fund operated by raising money from ordinary investors and then lending money to property developers and other businesses at higher rates.

Four weeks ago, auditors for the company approved the group's accounts and raised no concerns about its financial viability. The Australian

For those who have already decided on physical precious metals and are wondering what form to buy it in, checkout this (somewhat tongue in cheek) flowchart from Jislizard on Silver Stackers:

CLICK IMAGE FOR FULL SIZE

For a more serious breakdown (which includes Gold) you might like to take a look at the section in my guide called "What to Buy" which briefly describes the main physical options available (in Australia) including: coins, rounds, bars and more.

One thing I would implore, if you are going to use "paper" forms of Gold and Silver, make sure you read the fine print. Many of the clauses and risks listed in the terms and conditions booklet can be an eye opener.

This post is not intended as a be all and end all on investing in Gold/Silver in Australia, but hopefully it will get you thinking before making a purchase and reduce the number of people blindly following the advice of others who may not have your best interests in mind and while I can appreciate the irony of having just said that while displaying affiliate links on this blog to purchase physical bullion, I can honestly say that I think it's a good idea for all investors to have at least some of their precious metals exposure in physical.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

BB.

 

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