Precious Metals Investing: Bullion vs. Miners We combine bullion, gold, and silver with money equities. One of the reasons for that is that gold and silver stocks can be quite liquid. They can be very illiquid depending on market conditions, and I think the investors are interested in both bullion and money equities. Money equities is a real investment. Gold and silver monies are active investment. But to me, physical gold and silver is money. It's not an investment. What it is is it sound money that doesn't degrade, it's very important and it provides like a cash buffer within my portfolio. But I think that the money equities are the active investment in the space. Now, having said that, they've been horrible for a long time, they've been very short periods where they've done very well, but really they are suffering from a very big and very important structural problems due with a misreporting of inflation. I think it's a very profound observation that inflation is much higher in real terms than the statistics infer. There's plenty of evidence for this, if one purposely dig into it. If you think about a gold and silver mining company as selling something which is priced off inflation on the screen because of course gold and silver, price of real interest rates and miniature trades take into account the formal data on inflation. So they are selling something which is pegged to Bloomberg as it were, whereas their costs are not, their costs are real. Their costs are rising in a much more secular structural way based on the real inflation rate in the real economy. That creates the horrible investment case, to gold and silver. Probably not what I should say since I invested in them, but that's also where the opportunity lies to me because we've had 20 plus years of this problem being in place in the sector. I think that what happened is we've ended up with now really profound operational gearing built-in to the stocks. So long as you buy quality, you don't go chasing racy ones, there's an enormous amount of operational gearing to rise in gold and silver prices available in that. For me, I don't think physical gold and silver on its own is enough of a hedge against the structural issues of the monetary system. Because if you have a two, three, five percent position in physical gold, what you're doing is you're saying, I want a two, three, five percent vote no in my capital. Well, that's fine but that's not going to make up for a potential very large write-downs elsewhere in your net worth pie chart, most to explain it like that. So for me, the gold silver mining equities are a bit like untimed call option. Now, you want someone that manage it because I think it's a very technical industry. It's not something that you should just be picking an individual golds of guy and go with that one. I think the idiosyncratic risk of individual mining companies is much greater than people realize. The skew is not in your favor, buying individual names. So whether one was by an index or a managed fund device which I manage, I don't really think that's something I'm going to push someone towards, but I do think that holding individual names is a bad idea. But I also think that this is the finest way to have a really meaningful and good exposure to a major trend reversal, which I think everybody is worried about. A lot of people are worried about this quite rightly, there's so much hurting, so much concentration, so much correlation, inability for people to own things which are going to move fast the other way. For me, this is what gold and silver mining stocks represent. Now they need to be selected carefully. We don't buy companies that are based in Africa, Central Asia or Russia anything like that because I don't think you need the additional risks involved in that to capture the return profile. But I do think that some people believe they can hedge themselves by holding derivatives, holding basically a timed short view on things. For me, that's not the best way to do this, because I think the big problem people have is timing this structural issue that we're all talking about. Gold and silver mining equities is something that it go bust. In the meantime, our very good way of achieving that. The individual golds silver mining stocks are a real problem for most investors. The temptation is to buy them, but you need the knowledge not actually even of a geologist, but specifically of a mine engineer in order for you to integrate the financials and the operating side of mining companies, particularly underground gold and silver mining companies, very technically complicated. So I think that if you don't have that, it's a fool's errand in buying individual stocks because what you're doing is you're saying I know better than a mine engineer. I mean you're not explicitly saying that but you're inferring this because an index or a fund is going to capture 90 percent, 80, 90 percent of any upside in an individual name. But what you're doing by investing in an index fund is you're avoiding the huge downside risks can be caused by whether it's geopolitical, whether it's operational, whatever specific idiosyncratic risk areas, there are many, many of them, and they usually do come along when you're not expecting it. So I feel strongly that avoiding that problem by layering your exposure is more pertinent in a sector than anywhere else. This idea that gold and silver mining companies are brilliant at capital structure, I think is just wrong. I think it comes from a lack of understanding of this problem of cost versus the gold price. So just to go into that a little bit, gold is money, silver is money and their pricing of full state on on the bond market. I'll say for me that it's not just the work of John Williams's shadow stats. There are other things as well which indicates that inflation can be around probably averaging nine percent over the last 20 years. I know that sounds completely shocking. But by the way, in truth, a lot of the most interesting investment I meet, you would agree with me they want to be up 10 percent net per year. Otherwise, they feel they're down. So that actually confirms that point. But if you accept that, then there's a huge input cost problem for these companies. We see it consistently when you model them out, probably you can see it's there. They're not able to hedge other way or avoid that problem. If costs are rising at ten and gold is at one, it's not a management problem. Now don't get me wrong. There are issues with corporate governance, renumeration, but I don't think that any bigger than they are elsewhere in other sectors. I think that there's a narrative here which doesn't really bear out when you really dig into it. The issue is with the way inflation is reported and thereby the way real interest rates price gold. That's where both the problem is come for a very long time, but also where the enormous investment opportunity lies. Because if gold does thoughts of breakout in a major way, you're going to see massive margin expansion, operational gearing to the upside from these companies and people can make fantastic returns on that basis.