Monday, December 26, 2016

MacroBusiness Censors Comments At Odds With Narrative

The comments section at MacroBusiness, once a lively space for robust economic discussion, now often acts as little more than an echo chamber.

If the response from readers is strong enough in disagreement with the site authors, then those commenting are belittled and ignored (as I wrote in MacroBusiness Persists with War on Cash in Australia). If there is an alternative view or statistics put forward which don't fit the MacroBusiness narrative, then they are ignored, name calling begins or in some cases the comments are edited or deleted altogether.

The most recent example of the latter was in the comments section of their recently released report 'Can the great “can kick” save Australia?' (paid subscriber only content). Basically the report amalgamates a range of charts and narrative which supports an outlook that several dark clouds on the horizon (end of car manufacturing, slow down in construction and mining, etc) will converge in a short space of time and crater Australia's economy. They have been writing to this script for a number of years now, slowly pushing out the timing as unexpected economic circumstances have impacted their predictions.

The report was released late Christmas Eve and I happened to be up at the time. After reading their report and having seen some statistics on manufacturing employment at Pete Wargent's blog around the same time, I decided to post these numbers under the report:

Click Image to Enlarge

The report posited that there is basically no hope that these converging economic headwinds might be offset by some other factor which hasn't been considered. I was simply suggesting that if the Australian Dollar is smashed to 50c or lower (against the USD), as has been predicted on MacroBusiness, then perhaps a resurgence in Australian manufacturing could be one positive factor to keep an eye on:

Click Image to Enlarge

My comment was met with a ridiculous level of hostility (particularly from David Llewellyn-Smith):

My original comment (first screenshot above) was later deleted along with a number of replies.

It's a real shame that the editors / owners of MacroBusiness feel the need to use personal insults and name calling to push their agenda. It's also ironic that they attack others for 'selective analysis' while censoring current or potential future positive economic developments (that they've ignored in their own analysis) from being posted in the comment section of their site.

Note: A number of my comments have been edited and/or deleted recently on MacroBusiness. To date I have only noticed edits which remove part of the content rather than add to it (this can still distort context). Be skeptical of my comments there if something looks amiss or I don't respond to your replies. You can always reach out via Twitter or email.


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Sunday, December 18, 2016

MacroBusiness Persists with War on Cash in Australia

I'm a regular reader, subscriber and intermittent commenter at MacroBusiness (less frequently since my comments started getting trapped in their spam filter or outright deleted when disagreed with). They often produce well thought out arguments on finance and economic topics, which aren't being covered adequately by the mainstream media.

However, these quality pieces containing mostly original content are interwoven with myopic 'filler' articles which often appear rushed, copy and pasting swathes of text from other sources, adding a few lines of comment and then posted to the site, acting as an aggregator of news. One such example recently had blogger Leith van Onselen writing about the elimination of large denomination bank notes, it ended on this note:
"Personally I believe Australia should phase-out both $50 and $100 notes. We are turning into a cashless society anyway, so phrasing-out these bills wouldn’t create much of a burden to the ordinary law-abiding person."
The article included a quote from UBS analyst Jonathan Mott, "Removing large denomination notes in Australia would be good for the economy and good for the banks" and this corker from Peter Martin, "Phasing out high denomination notes would be painless, for those of us with nothing to hide" (eerily similar to a quote often attributed to Nazi propagandist, Joseph Goebbels).

The post on MacroBusiness generated hundreds of comments from readers who disagreed with the blogger. Many of them putting forward solid arguments against his conclusions, which included the following:
“..legalising all drugs would do much more to stamp out organised crime than removing large bills.”

“I don’t see why a digital record of every transaction I make should be kept and intercepted and stored by an all seeing government. There are some cases where cash makes sense and where you don’t necessarily want certain individuals to know what you’re buying, when and why. Not all of it is illegal.”

“How are banks held accountable in your cashless society? If banks (let’s say all of them), take undue risks, how is a depositor to “opt out”?”

“Let’s make it so no small market can exist. We can’t have farmers growing good food and selling it straight to people who want it. We MUST force everyone into the big supermarkets. Let’s make it so when all these mad elitist bastards want negative nominal IR’s there is no way to avoid their lunatic scheme for the world.”

“Moving to a cashless economy presently means that you must use a bank as an intermediate. The banks are private corporations that are so powerful they can’t be investigated.”

“..removing 50’s and 100’s has no impact on the black economy. It just becomes an inconvenience for everyone else.”

“We can’t trust the banks to give us financial advice, and we need a Royal Commission into them just to try and get them honest (unlikely to happen), but it’s okay to eliminate high-denomination notes and keep that money in banks instead?”

“..If we real see yields on bank deposits head to/below zero and stay there…….why would you keep your money in a bank in that environment”

“The problem with non cash transactions is the simply ridiculous amount of information (data) that’s being collected (and permanently stored) about individuals and what they buy, when and where. Big data is the corporate gold mine that industry is just starting to really use, most governments are still in the clueless category but they’re learning quick AND they are being sold different service packets by big-database owners. So it’s not simply about the government storing purchase information information about you tomorrows big data is a global corporation and provides a 100% clear picture of each and every individuals life, who they associate with and when and where this happens. Transactions are the glue that ties it all together, the purchase that links you personally with all the available data.”

“China only has 100 RMB notes (about $20 AUD). It didn’t stop tax evasion. It didn’t stop money laundering. It didn’t stop drug dealing’. Of course, having high denominations will make it easier, but to say all of this will magically disappear when the $100 is phased out is wrong.”
Eliminating cash eliminates the option of using cash to protect oneself in various difficult circumstances – some legal, some quasi-legal and some no doubt illegal…. but all *ethical*. The most obvious one is trying to survive when your government falsely believes you are a criminal. This happens all too often now and is probably only more likely in future. Removing cash without providing an alternative for people who might face these challenges is a VERY F*CKING BIG DEAL.
Leith's response in the comments included praising India for their recent demonetisation of "large" denomination notes (value of which are in the vicinity of A$10-20), calling those who disagreed with him tin foil hatters, suggesting that removal of the $100 note would "certainly interrupt the black economy" and finally bowing out of the comments without addressing many of the valid arguments raised by his readers.

I had considered writing this post after this first article, but thought I would give Leith the benefit of the doubt, perhaps his brain fart would not be repeated and he would not broach the subject again. I was wrong. In the last week Leith published a follow up article supporting comments from Kelly O’Dwyer (oft referred to as Kelly O'Liar in MacroBusiness headlines when she says something they don't agree with), vilifying the $100 note. Leith failed to address any of the reasoned comments which followed his last article.

The article generated more comments worthy of consideration, which included the below:
"What on earth is wrong with people holding cash if they choose to? As many have noted – criminals will readily find some other way of settling their transactions. Opposition to cash usually boils down to the latest efforts by the private banks and their minion neoliberal cheerleaders wishing to extend the already virtual private monopoly over money creation to a complete monopoly."

"I’m still in Vietnam at present and took cash with me to exchange while here for spending money. Every money exchanger I have come across has $100 notes, I only brought $50 notes as I withdrew them from the ATM. How many other money exchangers and foreign banks have pools of Aussie $100 for exchange purposes across the world? Maybe instead of blaming criminals they should be considering this?"
The second comment in particular makes a lot of sense and explains one reason we may be seeing an increase in demand for high denomination notes, for tourists traveling to our country (in the 12 months to October 2016, the annual number of arrivals increased by 11.1% relative to the corresponding period of the prior year):

A recent RBA Bulletin (The Future of Cash) points to similar reasoning: with major cash industry participants indicates that increases in overseas demand are a fairly usual occurrence when the Australian dollar depreciates. Part of this demand is likely to stem from the increased attractiveness of Australia as a destination for tourism and education, with both of these groups of visitors tending to be large users of cash.
The bulletin highlights that due to the anonymous and untraceable form of cash, it is impossible to calculate how frequently cash is used in facilitating illegal activities:
A potential source of currency demand that has attracted international attention recently is the use of cash, particularly high-denomination banknotes, to avoid reporting income to the authorities, or to finance illicit activities. Cash may be valued by those engaged in such activities because it is anonymous and untraceable. By definition, however, this also means that it is not possible to assess the demand for cash for these purposes accurately.
However, it does highlight that phasing out the $100 note is unlikely to be disruptive to criminal elements:
As noted, it is not possible to estimate the extent to which cash, or any particular banknote denomination, is used in illegal activities. However, liaison with AUSTRAC (Australian Transaction Reports and Analysis Centre) and the Australian Crime Commission suggests that it is the $50 denomination – rather than the $100 – that tends to be preferred by criminal elements because of its ubiquitous use in legitimate transactions. This suggests that to the extent that the $100 banknote is being used for nefarious purposes, any phase-out may not be particularly disruptive to those engaged in such activities.
This directly contradicts Leith's claim that getting rid of $100 notes would "certainly interrupt the black economy".

And if you thought about it rationally, a lot of the transactions occurring to avoid tax (e.g. tradies performing 'cashies') or buy illegal goods would continue unimpeded using smaller notes as the transaction would typically be only a small handful of notes regardless of whether using $50s or $100s.

The RBA highlights there are many legitimate uses for cash:
Demand for cash in the economy stems from its roles as a means of payment and a store of value.

As a means of payment, cash has a number of attributes that may be valued by end users.

It has near-universal acceptance, facilitates simultaneous exchange and instantaneous settlement, is convenient for person-to-person payments and can still be used at times when electronic payment methods are unavailable due to internet or electricity outages.

Cash transactions are also anonymous and, with low rates of counterfeiting in Australia, fraud may be less of a concern than when using alternative payments.

Cash can also be used as a store of value and, for this purpose, its attributes come to the fore in times of economic/financial uncertainty. In particular, in circumstances in which the viability of banks is under question – as was the case in many countries during the 2008–09 financial crisis – cash may be considered a superior store of value to money held in the form of bank deposits. That is, claims on the central bank are preferred to claims on a commercial bank.
And let's face it, a move to reduce large denominations is really a nudge toward a cashless society, which would have it's own problems as recently highlighted by the BIS:
There are academics and politicians advocating the abolition of cash. What do you think of that?

Negative nominal interest rates, especially if persistent, are already problematic. Quite apart from the problems they generate for the financial system, they can be perceived as a desperate measure, paradoxically undermining confidence. Getting rid of cash would take all this one big step further, as it would signal that there is no limit to how far into negative territory nominal interest rates could be pushed. That would risk undermining the very essence of our monetary economy. It would be playing with fire. Also, it would be quite a challenge for communication, even in simply economic terms. It would be like saying: "We want to abolish cash in order to tax you with lower negative rates in order to - tax you even more in the future."
All things considered phasing out $100 (or large denomination) notes would be a pretty awful policy direction for Australia to take. It would:
  • Make it more difficult to keep spending private (from government / corporations / banks)
  • Limit options when trying to protect oneself from risky banks (ironically something MacroBusiness highlights often)
  • Inconvenience those needing to use cash regularly in transactions, a majority of which would be conducted legally.
And all despite lack of evidence or reasoned argument that doing so would reduce the so called "black economy".

The team at MacroBusiness need to think this one through a little better.


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Tuesday, September 20, 2016

Gold Exposure For Superannuation Without An SMSF

I have written on gold exposure in superannuation without the need for a Self Managed Super Fund (SMSF) in past articles here, for example some funds allow direct equity investment. IOOF Employer Super (previously know as Spectrum Super) is one such fund and has a fairly extensive list of direct shares and securities (including gold miners and PMGOLD).

As mentioned in a recent post I have added gold related positions to my super the last couple of years with Silver Lake Resources (SLR), Medusa Mining (MML), Norther Star Resources (NST) and since then Regis Resources Limited (RRL), but not everyone wants to expose themselves to the risks associated with miners. Not everyone wants a level of involvement in their super investments such as that which is required to pick miners or work out what allocation they should have to gold.

What is a conservative allocation to gold in your superannuation fund anyway? 5%? 10%? How does 25% sound...
"The Permanent Portfolio is an investment strategy developed by Harry Browne in the 1970s that advocates splitting your money equally across four assets – cash, gold, equities and bonds – and rebalancing back to that split whenever they diverge too much. Mainstream financial planners would probably balk at a 5% allocation to gold, let alone 25%, but how does such a strategy perform in reality and could you get your financial planner to consider it?

For Australian investors hard numbers on the Permanent Portfolio strategy can be found by looking at the Cor Capital Fund, run by Davin Hood. His latest Quarterly Report is out and his fund’s performance, as summarised in the chart below, I think justifies giving the strategy some consideration."
The above written by Bron Suchecki in 2015 was paired with a chart which I have taken the liberty of updating for this article:

Click Chart to Enlarge
Bron continues:
"It is important to note that the blue line is the theoretical performance of the strategy before the fund started and the white line is its actual performance. What is clear from this chart is the low volatility of the fund’s performance – yes, you don’t get big gains (as the Australian Equities line shows in 2006 & 2007) but nor do you get the big losses (as happened in 2008). For those looking for a consistent and safe investment plan for the long run, this chart shows that the strategy has merit.

Part of the performance comes from not just the choice of asset classes to allocate to but the disciplined rebalancing between those asset classes. Unless you are willing to hold all of these asset classes, and sell those which are up and buy those which are low, the strategy probably will not work as indicated.

Unfortunately, if you are looking for someone else to be that disciplined investor for you, Cor Capital is currently limited to sophisticated/wholesale investors, which means, for example, an initial investment of $500,000."
It has been highlighted to me that this fund is now far more accessible for Australian investors, particularly for those with an interest to buy in through super. You can allocate as little as $1000 to the Cor Capital Fund if you have at least a $5000 super account balance.

As briefly described on the ABC Bullion website:

1). Open a brightday Complete Super Account
2). Transfer some or all of your Superannuation to brightday
3). Invest in the Cor Capital Fund

They have a more in depth brochure available here.

On seeing this, my first thought was to take a look through the Cor Capital Fund PDS (cynical I know). A number of risks associated with gold were listed (price risk, government risk e.g. change in laws), but interestingly saw no mention of custodian risk and the only mention of how the gold was held, "Physical gold is held in professional bullion vaults on our behalf."

I sent an email to enquire how the gold is stored and received a prompt reply from the Portfolio Manager (Davin Hood): 
"The Fund precious metals allocation (25% approx.) is currently 99.8% in physical gold and we keep about half in Perth at the Mint and half in Sydney at Custodian Vaults (ABC)."
I do like that the fund has a conservative approach even with the storage of it's gold, diversifying across the two companies and locations.

I don't have any intention in the near future to move a portion of my super into this fund, however it looks like a reasonable option to consider for those who want to have exposure to gold as part of a diversified portfolio in their super.


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Thursday, August 4, 2016

Australian House Prices in Gold / Silver Ounces (2016)

Every 12 months I have been updating the data I keep on Australian house prices measured in ounces of Gold and Silver. Here is the latest update which takes us through to June 2016 (inclusive).

Data for house prices is via Residex (median house price indices).

Data for Gold and Silver prices is via Perth Mint (bid average AUD).

Key Figures:

Adelaide (Ounces to buy a house) 
Housing Peak Against Gold (February 2005): 501oz Gold
Latest Figures (June 2016): 258oz Gold, 19,332oz Silver
Based on Current Spot Price: 249oz Gold, 16,389oz Silver

Brisbane (Ounces to buy a house)
Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver
Housing Peak Against Gold (February 2004): 600oz Gold
Latest Figures (June 2016): 296oz Gold, 22,237oz Silver
Based on Current Spot Price: 286oz Gold, 18,852oz Silver

Melbourne (Ounces to buy a house)
Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver
Housing Peak Against Gold (February 2004): 661oz Gold
Latest Figures (June 2016): 433oz Gold, 32,460oz Silver
Based on Current Spot Price: 417oz Gold, 27,519oz Silver 

Perth (Ounces to buy a house)
Housing Peak Against Gold (July 2007): 642oz Gold
Latest Figures (June 2016): 295oz Gold, 22,128oz Silver
Based on Current Spot Price: 285oz Gold, 18,759oz Silver

Sydney (Ounces to buy a house)
Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver
Housing Peak Against Gold (February 2004): 1100oz Gold
Latest Figures (June 2016): 625oz Gold, 46,876oz Silver
Based on Current Spot Price: 603oz Gold, 39,741oz Silver

(Spot Price ratio calculated on A$27/oz for Silver, A$1780/oz for Gold)

Gold and Silver (monthly data) outperformed all capital city prices since the last update.

My position remains the same as it has been since 2014:
"Over the same period (next 3-5 years) I expect rising precious metal prices and a lower Australian Dollar, so do think investors stacking ounces for the eventual purchase of a house will be rewarded (even those in Sydney). Only time will tell if I'm right." 
That said I purchased my own home again in the past 12 months as recently covered on the site:
"But my advice would be not to live your whole life waiting for, planning for, or even hoping for, the next "big crash" (either of the financial system or housing market, arguably the two are joined at the hip in many modern economies).

That might sound odd coming from someone who's analysis, speculation and investments led them to buy a lot of precious metals and write under a handle like 'Bullion Baron'. Some readers may picture me as a nutter with a bunker full of long life food, guns and Gold, just waiting to live out the financial apocalypse 'doomsday prepper' style, but the reality is far less intense.

I'm not saying you shouldn't be prepared for and insure yourself against financial catastrophe, but once you have done so, go out and live a little. The last significant purchase of Gold I made was in late 2014 (after accumulating in the dips periodically in the 6 years prior). I have recently felt comfortable buying a home again in my local property market, Adelaide."
Here are the charts (click any to enlarge).


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Thursday, July 21, 2016

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:

  • 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)

  • 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)

  • 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):

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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.


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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