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Factors That Should Lead To Higher Gold And Silver
This is an excerpt from my latest issue of the Mining Stock Journal, released this afternoon (Thursday, September 21st):
The point here is that, even with demand from India lower than usual for this time of year (as reflected by the discounts observed in India currently), several other countries in Asia and the Middle East have increased their gold importation. I believe this is why the repetitious attempts to push the price of gold and silver lower recently in the paper derivatives markets in London and New York have been unsuccessful. Moreover, despite the common misperception that the Fed’s “hawkish” policy is bearish for gold and silver, the prices of both metals have not only been resilient buy, in my opinion, are consolidating for a big move higher in the near future.
I discuss my rational for why I believe the confluence of several factors will drive gold and silver higher despite the Fed’s allegedly “hawkish” monetary policy. I also do an in-depth review of a junior explorer with what I believe is at least 5x upside potential. My review includes a conversation the Company’s CEO. You can learn more about the Mining Stock Journal here: MSJ information
Meanwhile, I discuss some of the factors I think will trigger a bull move in the precious sector that could rival, if not exceed, the 2008 – 2011 bull cycle in the sector:
The Economy, Credit Markets, Gold And Silver Are Reminiscent Of 2008
It’s my contention that the current economic, credit risk and stock market conditions are similar the 2007-2008. Specifically, it think there’s a chance that a seriously adverse credit event is percolating while the banks engage in an overt price control effort of gold and silver. Both of these attributes are eerily reminiscent of the fall of 2008. In my latest Arcadia Economics podcast, I refute the common mainstream media and Wall Street “expert” view that the economy is robust. I also explain why I think a big move higher in gold and silver could unfold before year-end:
I publish the Mining Stock Journal newsletter. Each issue features original market commentary and updates of the stocks I recommend. With junior project development mining companies I search for ideas that are not well-covered yet by brokerages and other newsletter publishers. With the larger cap, producing miners I recommend, I look for companies that I believe are undervalued relative to their peers and which offer the opportunity to earn “alpha.” You can learn more about my newsletter here: Mining Stock Journal information
Fortuna Silver Is A Strong Buy After The Stock Price Ambush
The following analysis is from the August 10th issue of my Mining Stock Journal. Click MSJ Information to learn more about this mining stock newsletter.
Fortuna Silver (FSM, FVI.TO – US$2.95) – Fortuna released its Q2 numbers after the close on August 9th. The stock was shot in the head, opening down as much as 12%. Unfortunately the current market sentiment and environment with respect to mining stocks is such that any unexpected “miss” in earnings, even when the causation is non-recurring and the numbers will bounce back the next quarter, triggers a big sell-off in the share price. This occurred with SILV (reviewed below) and Hecla.
On a YoY basis, FSM’s sales declined 6%, mine operating income fell 2% and operating income dropped 41%. Net income actually rose from $1.6mm in Q2 2022 to $3.2mm in Q2 this year due a huge reduction in the income tax attributable to a loss at San Jose as well as lower income before taxes. Unless the prices of gold and silver move substantially lower in Q3, I expect that the decline in revenues etc will be a one-quarter issue this is almost entirely attributable to non-recurring issues during Q2.
The reduction in operating income was due mainly because of the lower volume of metal sold at San Jose from the 15-day mine stoppage due to the illegal blockade at the mine and lower volume at Lindero related to the mine sequence (transitioning from a depleted reserves “block” to the next reserves block). While sequencing occurs intermittently, it is a temporary issue but resulted in higher input costs and lower processed gold grades.
Fortuna settled the labor dispute expeditiously and decisively. However, the Company incurred a $6.3 million non-recurring expense connected to the work stoppage and strike settlement ($2.8 million related to the new labor agreement) and $3.5 million related to one-time charges at San Jose and Yaramoko. In addition, a $1 million administrative penalty payable to the Ministry of Mines was incurred at Yaramoko. The Yaramoko non-recurring expenses were connected to the temporary stoppage of underground mining at the mine.
All of the above had the effect of an unexpected spike higher in the all-in sustaining costs (AISC) per ounce for the quarter. The largest component of this was due to the stoppage at San Jose which resulted in lower Au-Eq ounces sold which caused the cost per ounce to soar for the quarter. In addition, the sustaining capex at Lindero jumped due to the additional expense related to Phase 2 of the leach pad expansion and higher capitalized stripping costs related to the sequencing. Stripping costs a Lindero will revert to a normalized level in Q3 and decline from there in Q4. In addition, the additional capex for higher underground development plus the work stoppage to accomplish this at Yaramoko added to the temporary AISC increase. Note that additional capex/sustaining capital expenditures at Lindero and Yaramoko are positive net present value investments.
Also note that although over 4,000 ounces of gold were produced at Seguela, the gold was not sold until early in Q3. This means that the Company did not get the benefit of the revenues from the gold produced but it has to account for the expense of producing that gold and ramping up the processing facility in the period that the gold was produced. Again, FSM will recapture this loss in Q3. Additionally, Seguela will contribute a full quarter of production, operations returned to normal at San Jose at the end of Q2, Yaramoko is now performing above expectations and the stripping phase at Lindero was completed in Q2. This should result with revenues, profitability and free cash should more than bouncing back in 2H 2023.
The Company reiterated that it expects to achieve full-year production guidance of 6.3mm to 6.9mm ozs of silver and 282k to 320k ozs of gold. San Jose is at risk of finishing the year below guidance offset by Caylloma and Yaramoko achieving the upper end of their guidance range. Seguela is expected to meet the lower end of its guidance range and Lindero is on track to achieve guidance. San Jose and Seguela are both sources of potential upside surprise.
I expect FSM’s numbers to more than recover from the non-recurring events that affected the Q2 results. The additional capex at Yaramoko and Lindero should improve the profitability of those two gold mines. Also, Yaramoko is now performing above the expectations that were set when the Company had to revise lower the proven/probable reserves. Stripping costs at Lindero will improve to less than 1:1 in Q4 which will boost profitability per ounce.
Because I have this conviction, I put on large position in the September 15th $3’s in my personal account (one of my largest call positions ever). If the stock does not recover in the next couple of weeks, I’ll move the calls out to December.
Wayfair Still Burns A Lot Of Cash – Time To Short The Stock
The following analysis and commentary is from the most recent Short Seller’s Journal. In the context of the stock market going “full idiot” right now, $W’s share price has levitated to an absurd valuation. You can learn more about this newsletter here: Short Seller’s Journal Information.
Wayfair (W – $76.88) – W reported its Q2 number on August 3rd before the open. Of course it reported a “beat.” The stock shot up from the previous day’s close of $72.89 to as high as $90 before closing at $84.67. It’s a reflection of the degree of insanity that has engulfed the stock market. Despite the “beat,” revenues declined 3.4% YoY from Q2 2022. Revenues have declined for nine consecutive quarters. The Company did manage to cut costs out of its operations. As such the operating loss declined to $142 million from $377 million. Nevertheless, a $142 million operating loss is not immaterial.
Embedded in the cost of sales and operating expenses is $167 million in equity-based compensation, which is non-cash. Although I think a short-squeeze is the primary driver behind the spike up in the stock price, the numbers manipulators like to look at the “as adjusted” operating income which adds back the cost of stock compensation. With W this manufactures operating income of $25 million. But the cost of stock compensation shows up in the form of stock dilution, which spreads the net income over millions of more shares.
The net loss for the quarter was $46 million vs a loss of $378 million a year ago. However, included in the net income is $100 million non-cash gain from the extinguishment of debt. The Company issued $678 million in 3.5% coupon convertible bonds and used part of the proceeds ($514mm) to buy back some of its 2024 and 2025 convertible bonds outstanding at a discount to carrying value, which gets booked as non-cash income. The remaining proceeds will be used for working capital and general corporate purposes.
But here’s the catch: W issued a greater amount of cash-pay converts at 3.5% and used the money to retire a lesser amount of 1.125% and 0.625% converts, thereby increasing its cash interest expense and increasing the amount of debt outstanding. I would suggest that part of the motivation/benefit of this transaction, aside from moving $514 million in debt maturities from 2024 and 2025 out to 2028, was GAAP earnings management because the transaction enabled the Company to add $100 million to its net income before taxes, albeit non-cash. Net-net the transaction weakened the balance sheet and it hurts shareholders.
The Company attributes the decline in cost of goods sold – which is where W managed to reduce the operating loss YoY – to “operational cost savings initiatives.” In pouring over the breakdown in costs in the footnotes, it looks like most of the savings was carved out of SG&A. Furthermore, a portion of the improvement in gross margin is attributable to sales mix but also lower sales volume. With nine straight quarters of declining revenue, Wayfair’s business is shrinking. And this is before price inflation is removed from the revenues.
In its entire nine-year history as a public company, W has had just five quarters of positive GAAP earnings. This is entirely attributable to the huge jump in revenues during the pandemic period:
W’s net income quickly plunged into big losses once the benefit from the pandemic faded. I think Q2 2023 is an anomaly because Q2 tends to be a seasonally strong quarter for the Company. The business is contracting. I suspect management cut as many costs out of the operations as possible. Unless revenues surge like they did in 2020 I believe W’s losses will revert back to the negativity experienced in 2019 and in the 5 quarters previous to Q2 2023.
The stock price is down 11.4% since the closing price the day it reported Q2. I’ve been riding puts since the day W reported. I currently am sitting on August 25th $74 puts. However, three months ago the stock was trading at $30. I’m considering putting on a position in the November $55 puts.
Here’s Why Amazon.com ($AMZN) Will Be A Profitable Short
The following analysis and commentary is from the most recent Short Seller’s Journal. In the context of the stock market going “full idiot” right now, AMZN’s share price has levitated to an absurd valuation. You can learn more about this newsletter here: Short Seller’s Journal Information.
Amazon (AMZN) reported its Q2 numbers on Thursday after the close and smashed the consensus estimates across the board. The operating profit margin was 5.7%, up from 2.7% YoY and 3.7% in Q1 2023. The stock jumped $11 on Friday, closing at $139.57 although it traded as high as $143.63. The source of the jubilation was an unexpectedly large increase in product sales (e-commerce, Whole Foods, etc) and a $3.2 billion operating profit generated by the products division. Interestingly, the Street and media ignored the glaring slowdown in AWS’ sales growth as well as the 6% YoY decline in operating profits for the cloud services business. Here’s what that slowdown in revenue growth looks like graphically (chart source: Bill Maurer, Seeking Alpha):
Another source of glee from the Street was a decline in the percentage cost of fulfillment for the products division. Analysts measure this as a percentage of total revenues. However, the Company discloses that the cost of AWS fulfillment is lumped into technology and content costs. Fulfillment, technology and content costs combined represented 32.2% of total revenues in Q2 vs 31.6% in Q2 2023. The cost of technology services “fulfillment” rose. In reading through the accounting treatment for products fulfillment, I believe it’s also possible that AMZN was able to shift the timing of recognizing some fulfillment costs to Q3. Finally, note that the average cost of fuel declined during Q2. Fuel costs likely will increase in Q3. These are variables that affect fulfillment cost accounting that Wall Street either neglects to recognize or fails to disclose.
Consolidated operating income more than doubled YoY from $3.3 billion to $7.6 billion, though the international products segment is still generating an operating loss. From a net income standpoint, AMZN generated $6.75 billion in net income vs a $2 billion net loss in Q2 2022. The Company likes to highlight free cash flow as the barometer of its operational performance. On a trailing twelve month basis the company swung from negative FCF to FCF of $7.8 billion.
However, for “show and tell” purposes AMZN uses its own version of FCF, defined as cash flow from operations less capex. This is non-GAAP and quite useless, particularly in AMZN’s case. Including the cost of principal payments on finance leases and financing obligations, AMZN’s GAAP FCF was $1.9 billion. Finance leases and financing obligations are a recurring and integral part of AMZN’s operations and thus true FCF is the $1.9 billion number.
While AMZN’s e-commerce business seemed to be hitting on all cylinders in Q2 and the Company guided revenues higher for Q3, for me the glaring red flag is valuation. First, up until this latest quarter, AMZN’s high valuation (market cap/operating income and P/E ratio) was rationalized by the bulls based on high growth/high margin AWS segment. That seems to be no longer. AWS is getting hammered by competition from the MSFT and GOOG cloud services businesses. It’s losing market share and the price competition is quickly eroding margins. In Q2 AWS’ operating margin was 24.2% vs 29% in Q2 2022. At one point in time historically, AWS’ operating margin hit the 30’s%.
AMZN’s price/sales ratio is 2.52. This is nose-bleed territory for a retailer. The average P/S for WMT, TGT and BBY combined is roughly 0.5. For the first half of 2023, AMZN generated $12.4 billion in operating income. I’ll give it the benefit of doubt and assume it manages to grow that by 10% in the 2H of 2023 to arrive at my estimated full-year operating income of $26 billion. The forward price/operating income ratio on this basis is 50.7. Keep in mind that’s the operating income multiple – 50.7 is more than double the price/earnings ratio of the S&P 500.
AMZN’s stock jumped because, based on just one quarterly observation, the market believes AMZN has turned around its e-commerce/products business and that it will sustain the cost improvements and sales growth. I disagree. AMZN likely will run out of room to cut operational costs and will likely face higher fuel costs for the rest of the year. Gasoline futures are 15.3% higher than at the end of June while oil futures (Brent) are up 19.4% from the end of June. The Company also will face strong headwinds from a rapidly slowing global economy and increasing financial stress of the average U.S. consumer. Also, the high-growth and profitability narrative for AWS is no longer. Furthermore, as the economy slides further into recession, companies will be cutting back on cloud services capex.
I am highly confident that AMZN will have a difficult time going forward to generate the operational and financial performance presented in Q2. Of course, the performance of the stock depends on the degree to which the stock market continues to view companies like AMZN with rose-colored glasses. As long as the bubbleheads continue to chase rainbows, AMZN’s stock will stay aloft. That said, I think longer-dated OTM puts are attractive, particularly if the stock market cracks this fall, which I believe will happen.
Carvana’s Equity Is Worth Zero
The following analysis and commentary is from the most recent Short Seller’s Journal. In the context of the stock market going “full idiot” right now, CVNA’s share price has been squeezed up to an absurd valuation. My rationale for shorting CVNA is that the equity is a bagel. You can learn more about this newsletter here: Short Seller’s Journal Information.
CVNA reported its Q2 numbers on Wednesday (July 19th) along with announcing a debt restructuring and sale of equity to raise up to $1.3 billion. I’ll briefly review the financials. Net sales of $2.9 billion (retail, wholesale, other) were down 23.7% YoY and up slightly from Q1 2023. The Company managed to slash costs enough to generate a small operating profit in Q2, though after interest costs net income before taxes was negative $105 million. A big improvement over the 2022 Q2 NIBT of -$438 million. However, I suspect particularly with used car prices heading south quickly that Q3 for CVNA will show lower revenues and a much wider operating/NIBT loss.
The nuts and bolts behind the revenue numbers are ugly. Retail units sold dropped 35% YoY. The wholesale operations acquired in the ADESA transaction are small compared to retail so I’ll leave that out. The operations generated $509mm in cash but that’s because CVNA continues to sell more vehicles than it replaces. Inventory has declined from $1.87 billion at year-end 2022 to $1.3 billion at the end of Q2. This is not a sustainable business model. CVNA slashed operating costs substantially but cut headcount by more than 4,000 and slashing its marketing expenditures.
Fundamentally CVNA’s business is shrinking. This will get worse in Q3 as both the Company and Autonation (see below) warned that used car prices will fall further in Q3. In all likelihood, the average cost per vehicle in CVNA’s inventory is not much lower that the price it can realize in the market now.
CVNA also announced a debt restructuring that will involve exchanging $5.6 billion in debt that matures between October 2025 and May 2030 for $4.3 billion of new notes that mature in December 2028 through June 2031. The new notes have a PIK feature for up to two years (pay-in-kind, meaning the Company can pay the interest expense for up to two years in more bonds rather than cash). However, the PIK feature comes at a steep cost. The existing debt carries an average coupon roughly of 8.9%. One tranche of the new notes has a PIK coupon rate of 12% and 9% cash thereafter while a second note tranche carries a PIK coupon of 13% and 11% cash thereafter and the third new tranche has a 14% PIK and 9% cash thereafter.
The weighted average cost of the PIK debt payments is roughly 13.1%. If CVNA chooses to PIK the notes for the first two years, after two years there will be roughly $5.6 billion in notes outstanding ($4.3 billion compounded 13.18% over two years). Not really a debt restruc-turing, is it? In conjunction with the debt restructuring CVNA will try to sell up to $1 billion in new shares via a series of ATM transactions (at-the-market in which the brokerages representing CVNA will intermittently dump new shares on the open market).
The mainstream media stated that the debt deal will save CVNA $430 million in interest expense over the next two years. But per the math I showed above, CVNA’s total cost of interest rises. To be sure, the deal will save CVNA from making cash coupon payments on the debt for two years. But from an accounting standpoint, it will still have to recognize the PIK payments as a GAAP interest expense.
This deal doesn’t help CVNA financially at all except short term from a liquidity standpoint. In fact, S&P said it views the restructuring as “distressed and tantamount to default.” The debt ratings were put on negative watch. The next downgrade would assign a “D” for “default” rating. Given that new notes will be secured by a 1st priority lien on all of the assets that are not used to secure the Ally Financial inventory financing facility. The notes will have a 2nd lien on those assets (used cars).
CVNA’s balance sheet is thus still a mess, with what ultimately will be $5.6 billion in debt outstanding on a company that continues to generate operating losses and whose business is shrinking. Website visits are down nearly 40% YoY and the number of vehicles listed online is down almost 50%. In the context of the debt “restructuring” and the need to raise a lot more cash, CVNA is on life support. This Company in my view will hit bankruptcy sometime in the next 12-18 months.
The stock is another matter. The stock price has shot up from under $4 at the end of 2022 to as high as the $55 close on Wednesday. Make no mistake, this was 100% the product of a short-squeeze and a call option gamma squeeze. The short interest at the end of June was over 50% of the float. It was 43% of the float on June 15th. This stock is such an obvious short that any entity that can secure a borrow and finance it is short the stock. On Thursday the stock dropped 16.2% and another 2.4% on Friday.
Carvana’s market cap is absurdly disconnected from reality, notwithstanding the fact that the stock is intrinsically worthless, it does not even have “optionality” value. Autonation (reviewed below) is still extremely overvalued even after Friday’s cliff dive. But here’s a comparison of the two companies:
Carvana is probably one of the most obvious shorts on the NYSE, which is why the short interest at times exceeds 50% of the float. The put options have a high amount of implied volatility but if you go out far enough and play OTM puts, it will pay off eventually. Short calls to take advantage of the high option premium is probably the best way to express a short view on CVNA. If you can obtain, finance and hold onto borrowed shares, you will never have to cover because ultimately the shares will be canceled in a bankruptcy restructuring or liquidation scenario.
The “Echo Bubble” May Be Popping – Short Autonation
The following commentary and short idea is from the latest issue of my Short Seller’s Journal. This is a weekly newsletter with economic and general market analysis as well as my favorite short ideas based on in-depth fundamental analysis. You can learn about the newsletter here: Short Seller’s Journal information.
I truly believe that what we’re seeing in the stock market is the anticipation of the Fed abandoning rate hikes after this month’s and possibly cutting rates starting in early 2024. In addition, I think the market actually believes in Santa Claus in the form of a soft landing or even no recession. Ironically, the economy is already recessing – just look at the latest retail sales report. The expression of the market’s view is in the format of hedge fund algo gamma squeezing, rabid short-squeezing and drooling retail idiots throwing everything they have at tech stocks and risky call options.
Investors are heaving cash at tech stocks. According to data from EPFR (EFPR is a provider of fund flows and asset allocations data), another $1.9 billion flowed into tech funds for the week ended July 19. This is cash from individuals – high net worth/retail – who in my opinion are being led to a slaughter. This was the pattern after the tech bubble popped. After the first part of the bloodbath, retail doubled down on their tech bets and lost even more money in the next big leg down in the stock market. In addition, per the NAAIM (National Association of Active Investment Managers), active managers’ exposure to the stock market has soared to 99%, up from less than 20% in October 2022 and the highest since November 2020.
Consumer spending is also slowing. A Fed survey released on July 16th showed that credit applications for any type of credit declined to its lowest level since October 2020. The overall rejection rate of credit applications increased to 21.8%, the highest level since June 2018. The rejection rate for mortgage purchase applications rose to 13.2% – i.e. 13.2 applications per 100 are denied. Auto loan rejections are at an all-time high. Based on real retail sales and credit applications, the consumer is in a recession.
But there’s more. It would appear that a lot of consumers are squeezed for cash. A report on July 7th showed that Google searches on the term “pawn shop near me” started rising in January and hit an all-time high at the beginning of July. This is further evidence that households are getting squeezed by the depletion of savings and persistently high inflation for necessities.
The Philly Fed index remained at -13.5 in July, which was its level in June. Wall Street was forecasting -10. This is the 10th straight month of contraction. The index continues to reflect the contraction of manufacturing activity in the Philly Fed region. The new orders index further declined to -15 from -11 in June. This is probably the most telling indicator of manufacturing activity and wholesale/retail demand for manufactured goods.
Retail sales rose 0.2% in June from May, missing the Street forecast of 0.5%, and were up just 1.49% YoY vs Wall Street’s consensus of 1.6%. There’s not a lot to dissect in the report but I’ll note that using just the CPI measured inflation real retail sales (“unit” sales) declined in June on a monthly basis and declined even more on a YoY basis. If the Shadowstats number for inflation is used, the decline in real retail sales is deepe. The Redbook index of same-store sales declined 0.2% vs the same week in 2022. It was the second week in a row of YoY weekly declines. Of course, ex-inflation the decline is larger. Put a fork in the consumer.
Existing home sales for June were down 3.3% from May on a SAAR basis (seasonally adjusted, annualized rate) and down 18.9% YoY from June 2022. Not seasonally adjusted existings fell 17.2% from June 2022. I think that metric is a cleaner indicator of the demand for used homes because it isn’t cluttered with statistical hocus-pocus. The Chief Goon for the NAR, Larry Yun, remarked that falling sales are a product of low inventory. Yet, new home-builders are sitting on a record amount of inventory with plenty of supply of finished new homes nationally. Moreover, the months’ supply of used listings rose to 3.1 months, up from a 52-week low of 2.6 in March, 2.7 in 2022 and 2.3 in 2021.
It would be more accurate for Yun to just admit that the average potential homebuyer just can not afford to buy a home if they are renting or move-up to a better home if they own their home (more like, rent it from the bank). And now that the Fed loosened up financial conditions in the banking system to prop up regional banks, home prices are quite “sticky,” further exacerbating low affordability conditions. In June the average price of a used home was $410k, up from $361k in January 2023 and up 3.3% from May. $410k is the second highest average price ever for used homes.
I have been pounding the table on Autonation (AN – $150) as short for a while. I reiterated that call two weeks ago as the stock was cresting at $180. AN’s share price was hammered for $21.81 (12.33%) Friday despite posting the customary earnings “beat.” Revenues basically were flat YoY for the quarter but the gross profit on new and used vehicle sales declined due to heavy price discounting. Operating income dropped 3.7% and net income plunged 27.6%. Part of the reason for the hit to net income is the Company’s interest expense more than doubled YoY (floorplan financing, which is short term-based rates and general debt expenses).
Management said that it expects profit margins to continue falling as the Company attempts to maintain unit sales via discounting, with fewer vehicles sold at the sticker price. Though new vehicle revenue increased by $345mm YoY (12%), this was more than offset by the $432mm decline in used car revenue (17%). Autonation further said that it expects used car prices to fall further in Q3 (on average, used car prices are down 17% YTD). Inventory continues to balloon as sales slow. Currently new vehicle inventory is at 26 days of supply, up from 19 days at the end of 2022. Used vehicle supply is 35 days vs 31 days at 2022 year-end. Lower inventory turns also hurts profit margins.
With AN’s market cap nearly doubling since the beginning of October 2022 in the face of deteriorating business fundamentals, it was just a matter of time before the stock chart served up a daily candlestick like the one on Friday. I mentioned in last week’s issue that I was looking at August or October puts. I ended up buying October $155’s on Monday and added to the position on Tuesday nearly a dollar lower in price. Little did I expect that the puts would be at the money this quickly. I sold half Friday morning but I plan to hold the rest for a while. If the stock trades higher from the current level, I’ll likely invest in some even longer-dated, further OTM puts. I see no reason why this stock shouldn’t retrace back to $95 or lower by year-end.
Gold And Silver Prices: Anticipating Another Price Rise in 2023
I wrote the following commentary for Kinesis Money – you can read the source article here: Kinesis Money Blog
I argue that a new bull cycle for the precious metals sector began in late October 2022 – when it appears that gold and silver had bottomed and turned higher, after a downtrend since August 2020.
I believe that the precious metals sector will soon begin a cyclical, sustained move higher that will see gold surpass $2,000 and silver trade up to $30, for starters.
The chart above shows the GDX mining stock ETF from the beginning of 2020 to the present. GDX does well to illustrate my point because often stocks will begin to price in an event or trend in the market ahead of the other areas in the financial markets.
Since hitting that post-August 2020 low at the end of October 2022, the mining stocks have traded in a steady uptrend for nearly nine months in a trend pattern characterised by higher highs and higher lows – a pattern that often occurs when a market is a bull trend.
This conclusion is based on several signals that have marked the bottom of similar painful cyclical precious metals sector declines in the past. In no particular order of significance, the indicators to which I refer include sentiment, trading action, demand for physical silver and gold and, last but not least, fundamentals.
As precious metals sector investors understand, investor sentiment toward the precious metals sector could affectionately be described as approaching the bottom of the Mariana Trench (the lowest point on the ocean floor). Last week, the Hulbert Gold Newsletter Sentiment Index hit one of its most negative readings in the last several years. This index has been a remarkably reliable contrarian indicator, meaning that extreme negative readings are associated with impending large moves higher in the sector.
Retail investor investing patterns also tend to be another accurate contrarian signal. Precious metals mining stock funds have been experiencing large outflows, likely primarily coming from retail investors. Based on historical patterns, the majority of retail investors are prone to chasing momentum in either direction but don’t usually introduce their cash until the late stages of a move.
Based on the flow of funds data, over the past four weeks, a record amount of retail funds for that time period has flooded into tech funds, individual tech stocks and single-stock call options. Conversely, volume in the gold and silver mining stocks until the last week or so has been quite low, particularly in the highly speculative, micro-cap junior exploration stocks.
The demand for physical gold and silver has been well-publicised and the record rate of gold buying in 2022 by eastern hemisphere central banks has continued into 2023. As reported in Bloomberg, according to the World Gold Council, China “officially” increased its gold holdings for the eighth month in a row in June.
These central banks are increasingly repatriating their gold bars to further ensure the security of their gold holdings. This is bullish because it removes the repatriated bars from the LBMA and COMEX custodial vaults, which thereby reduces the visible supply of gold. This, in turn, reduces the amount of bars available for hypothecation activities like lending and leasing.
From the Reuters article:
“One central bank, quoted anonymously, said: ‘We did have it (gold) held in London… but now we’ve transferred it back to own country to hold as a safe haven asset and to keep it safe.’”
The fundamentals that support higher valuation levels for gold, silver and mining stocks are as strong, if not stronger than at any time in the last 22 years. Despite the Fed’s “hawkish” rhetoric, real interest rates are still negative, if you use a realistic measure for inflation rather than the “highly massaged” government CPI.
The Fed has made very little progress in reducing its balance sheet. Also, the amount of debt issued and outstanding by the U.S. government, while existentially beyond management, is about to go much higher. This is highly bearish for the dollar and bullish for precious metals.
The US dollar has declined 13% from its recent high in September 2022. Since the beginning of July, the dollar appears to have gone into free fall. This could reflect the fact that the market is anticipating a “pivot” by the Fed on its rhetorically hawkish monetary policy.
This also reflects the anticipation that the Fed could start printing more money to support the financial system. This is primarily why I believe that the precious metals sector has begun a new bull move in which gold is poised to make a run for a new all-time high and silver could run up to over $30.
I publish the Mining Stock Journal newsletter. Each issue features original market commentary and updates of the stocks I recommend. With junior project development mining companies I search for ideas that are not well-covered yet by brokerages and other newsletter publishers. With the larger cap, producing miners I recommend, I look for companies that I believe are undervalued relative to their peers and which offer the opportunity to earn “alpha.” You can learn more about my newsletter here: Mining Stock Journal information
Fed Monetary Policy, The Economy and Gold, Silver And Mining Stocks
I believe that the cyclical down trend that began in August 2020 may be exhausted. I further believe that the precious metals sector will soon begin a sustained move higher that will see gold go well over $2,000 and silver trade up to $30, for starters. I am comfortable making this assertion, sans a specific timing prediction, based on several signals that have marked the bottom of similar painful cyclical precious metals sector declines in the past. Not in any order of emphatic significance, the indicators to which I’m referring include sentiment, trading action, demand for physical silver and gold, technicals and, last but not least, fundamentals – That’s an excerpt from the intro to the latest issue of my Mining Stock Journal
Craig Hemke invited me on to his Thursday podcast to discuss the Fed’s monetary policy, the current state of the economy and U.S. dollar and, of course, the precious metals sector. Certainly to describe the Fed’s policy stance as “hawkish” is a joke and I explain why:
I also publish the Short Seller’s Journal. The latest run higher in stocks will soon end. At current levels using standard valuation metrics, stocks are as overvalued now relative to fundamentals as at any time in history. I offer fundamentals-based short ideas in my newsletter. You can learn more about it here: Short Seller’s Journal
Gold and Silver: The Bottom Is Likely In, A Move Higher Coming
With rumors flying and heavy anticipation that the BRICs alliance along with the Asian/ Eurasian allied bloc of countries will unveil a gold-backed digital currency in August, several subscribers have asked my opinion on whether or not it will happen and, if so, what are the implications. First, I think the inevitability that a gold-backed currency will be issued by the growing, economic/geostrategic alliance of countries is certain. The timing of this move, however, is questionable. I further pursue this discussion in the latest issue of my Mining Stock Journal.
In this bi-weekly Arcadia Economics episode, Chris and I discuss our visit to Fortuna Silver’s new Seguela Mine operation in Cote d’Ivoire, Africa as well as my view that the precious metals sector is percolating for a big move higher: Gold, Silver Surge Higher On Low Inflation Reports