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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

Diarrhea Of The MSM Keyboard Is An Indicator Gold And Silver Are Bottoming

For the most part, it usually seems like the mainstream media just ignores gold and silver, and has little interest in even covering the precious metals at all.

Whether that’s due to a desire to keep people focused on the stock market, or just a lack of interest, is a fair debate. However, as Dave Kranzler points out in today’s episode of the show, on the rare occasions when they do mention gold or silver (typically to say how useless they are), it’s often been a sign that a bottom is in.

So in today’s show, Dave talks about a recent article (keyboard diarrhea) that suggested how gold has no purpose and isn’t an ‘exciting’ asset. He addresses some of the assertions put forth in the piece, and why they’re not accurate in terms of how people would be wise to view the gold market. And he also raises the proposition that seeing this type of coverage could be indicative that a bottom is in for the current cycle.

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Many mining stocks are in a wide uptrend channel that began in late September 2022. The latest sell-off in the sector has taken them to the bottom of the sector. I review a larger cap producer that fits this description and that also has a fat dividend yield while we wait for the next bull move in the latest issue of my Mining Stock Journal

Brief Summary Of My Latest Short: EXP World Holdings

The following commentary is an excerpt from the June 18th issue of my short selling newsletter. EXPI is an MLM dressed in drag as competitor to Redfin and Zillow. Regardless, with sales activity in the housing market declining and with nothing in sight that will reverse that trend, the revenue pie for these “digital” realtors is shrinking – fast. You can learn more about my newsletter here: Short Seller’s Journal

I started looking at EXPI as a short in late August 2022 when the stock was trading at $20. It sold down to $10 before I could finish evaluating it. It traded back up to $18 by February 2023 and then quickly sold off back down to $10. It started another levitation up to $15 by late May, then shot up to $21 a week ago Friday when it replaced Heska Corp in the S&P 600 small cap index.

EXPI provides cloud-based residential real estate brokerage services. It boasts that it hosts over 88,000 real estate brokers globally. It has lavish equity award programs, including the ability to receive 5% of commissions in stock at a 10% discount and $400 in stock for each agent recruited to join the company after that agent closes its first transaction. That latter aspect makes it similar to a multi-level marketing operation and thus the operations closely resemble a pyramid scheme. One of the big problems with this model is that stock awards are often dumped into the market as soon as the can be registered. The compensation model is heavily dilutive. As an example, at the end of 2019 the Company had 60.6 million shares outstanding. But by the end Q1 2023 there were 174.5 million shares outstanding.

As you can imagine, revenues grew quickly between 2020 and the end of 2022. Revenues for the full-year 2022 were $4.5 billion. But in Q1 2023 revenues declined by quite a bit, falling to $850 million YoY from $1 billion (a 15% decline). The Company incurred a $1.6mm operating loss vs $4.4 million of net income in Q1 2022. $26mm of SG&A in Q1 was non-cash stock compensation. Thus, the operations generated $56 million in cash but this was down nearly 50% YoY from Q1 2022. In other words, heavy share dilution continues but the actual economics of the business model is deteriorating quickly.

The company’s market cap of $2.93 billion is far too high for a company that is barely producing any operating income. To give you an idea of how quickly the profitability is deteriorating, 81% of its 2022 operating income was generated in Q1. On a trailing 12 month basis, the company generated a small operating loss. Let’s look at the market cap to “cash flow from operations” metric instead. The Company is trading at 20x what might be operating income if it didn’t hand out a heavy dose of stock as compensation. But then again, if it didn’t attract brokers with the allure of stock, it might not have a business to operate. Regardless, a 20x multiple of what tenuously might be regarded as operating income is an insane multiple, especially for a company in a highly cyclical business.

This stock is going to crater back to $10 again. Since getting inserted into the SPX 600 small cap index, volume has dried up precipitously. The MACD is rolling over from its highest level since early November 2021, which is when the housing market and homebuilder stocks rolled over. The RSI suggests the potential for a rapid, steep retrace of the breakaway gap. I think this stock will be back at $10 before the end of August. I started to accumulate July $17.50 puts last week. If the stock doesn’t drop below $17 by the end of next week, I’ll move the position out to August and add to it. I don’t think it’s unreasonable to expect a triple in the August $17.50’s.

Something Interesting Could Be Unfolding In Gold And Silver

Note: The commentary below was published by Kinesis Money. It also was the opening commentary in my latest issue of the Mining Stock Journal.

In my opinion, the precious metals sector is beginning to “sniff” the prospects of a likely reversal in the Fed’s monetary stance, possibly before the end of 2023.

Recently, I presented the argument that, based on the set-up between the bank net short position and the hedge fund net long position in COMEX gold and silver futures, the prices of gold and silver likely were headed lower, with help from the COMEX banks, based on previous cyclical open expansion and contraction patterns.

Well, it seems that this cycle may have been interrupted and that interruption may be coming from the physical gold and silver markets.

Gold and silver to rise in Q3 2023?

The chart above is a 1-yr daily of the gold price. The price has bounced off the uptrend line I sketched. The RSI & MACD (not shown) are both extremely oversold and have turned higher.

Please see the rest of this commentary here: Latest Gold & Silver Market Developments: Into Q3 2023

The Stock Market’s Echo Bubble

The following commentary is an excerpt from the latest issue of my Short Seller’s Journal. The newsletter is published weekly. It reviews the weekly stock market action, economic numbers and some short ideas. Tesla is reviewed weekly. You can learn more about this newsletter here: Short Seller’s Journal

The run higher in the Nasdaq has become insane. It’s an “echo bubble” from the bubble that popped in November 2021. The Fed fueled this when it juiced its balance sheet by $400B in order to bail out uninsured depositors at the regional banks. But don’t be mistaken, Citigroup was feeding hungrily at the Fed trough as well. That $400B is now being drained. That along with the liquidity sucked out of the financial system should lead to another Nasdaq crash sometime this summer and possibly usher in the next round of QE.

All of the classic “blow off top” indicators are flashing again. The Vix is back to where it was in November 2021, when the bear market began with the Nasdaq heading south:

The chart above compares the Vix “fear” indicator with the Nasdaq composite index over the last two years. Based on the Vix, which measures equity call premiums vs put premiums, investors are as fearless as they were in November 2021.

The put/call ratio is at its lowest level since March 2022:

The previous two times over the last two years that the put/call ratio was as low as it is now, it preceded a big sell-off in the stock market.

The negative divergence between the Nasdaq and its advance/decline line is astonishing:

The advance/decline line is calculated by taking the difference between the number of advancing stocks net of the number of declining stocks. When the ratio is declining, it indicates that there’s more stocks selling off than moving higher. This chart is another to illustrate that the run in the Nasdaq has been driven by just a handful of the largest cap stocks in the Nasdaq composite.

Finally, last week a weekly record of $8.5 billion flowed into tech mutual funds.

The stock market – particularly the Nasdaq – is showing all of the classic signs that a speculative blow-off top is forming. In addition to the above indicators, the RSI and MACD momentum indicators for the Nasdaq are in nose-bleed overbought territory. The Nasdaq also has outperformed the Dow and the SPX by a considerable amount since mid-May. The momentum indicators for the SOXX index, which is subject to the highest degree of retail speculative frenzy, are extremely overbought and the parabolic rise in the SOXX has been accompanied by rapidly declining volume. It’s impossible to know when the rug will be pulled out from under the market, but in my opinion the sell-off will be sharp and swift.

Extraordinary Bullish Conditions For Gold (A Couple Of Stock Picks Too)

Banking crises, debt ceiling crisis, a U.S. recession (yes, real economic activity is contracting particularly in housing, manufacturing and consumer spending) and geopolitical crises – the fundamental conditions supporting considerably higher gold and silver prices strengthen by the day. Bill Powers invited me on to his Mining Stock Education podcast to discuss the prospects for the precious metals. I also offer a couple of my favorite current mining stock ideas.

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If you are looking for mining stock ideas that should outperform the sector, especially junior microcap ideas, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal

Housing Market Misinformation And Disinformation: Beazer $BZH Example

The hype, misinformation and disinformation from housing market propagandists and home salesman (aka “realtors”) has become unbearable. Here’s a prime example:

Now, I don’t know if this fella actually examines SEC-filed financials or if he just sees financial headlines announcing that a particular homebuilder “beat” estimates and, from that, assumes that “profits have been fantastic.” Make no mistake, there’s a big difference between “beating” management-sandbagged guidance and actual profitability. The “earning” beat game in fact has become mindless idiocy.

While it’s true that homebuilder stocks are hitting 52-week highs, the profitability and industry fundamentals have diverged quite negatively from homebuilder valuations. This is not unlike the tech stocks peaking in early 2000 despite rapidly deteriorating fundamentals.

Beazer Homes ($BZH) is a prime example and just the latest homebuilder to report its fiscal year quarter accompanied by an earnings “beat.” But a look under the hood including a perusal of the footnotes that accompany the financial statements – a place no stock promoter would dare venture – shows sharply declining profitability and rapidly shrinking book of orders.

BZH reported is FY Q2 on April 27th after the market closed. The headline EPS of $1.14 handily “beat” the Street consensus of 83 cents. It didn’t matter that new orders fell 8.5% YoY in Q2 vs 2022 and were down 36.2% from FY Q2 2021. New orders through the first half of BZH’s FY 2023 are down 31.6%; the cancellation rate in Q2 was 18.6% and 25% through the first six months; and the order backlog is down 40.5%, with the dollar value of the backlog down 37.7%. BZH’s operating income plummeted 29% and its net income plunged 22% YoY for the quarter. But because the headlines number “beat,” BZH’s market cap jumped by $125 million:

BZH’s valuation is back to where it was in November 2021, around the time it was apparent that the housing bubble was popping. At the end of 2021, BZH’s market cap was 50% of the value of its order backlog value at the time. Currently BZH is valued at 66% of the value of its order backlog. Keep in mind that the Company’s contract cancelation rate over the last six months is running at 25%, which implies that, going forward, a material number of homes in the order backlog will be finished without a buyer. This is sheer insanity, particularly with the economy sliding into what will be a nasty recession.

Beazer is not unique. DR Horton recently reported an earnings “beat” accompanied by financials and operating statistics similar to Beazer’s. Yes there’s been a small dead-cat bounce in home sales in 2023 attributable in part to seasonality and in part to the drop in mortgage rates that accompanied the decline in the 10-year Treasury yield. But for the potential average home buyer (sub-740 FICO, less than 20% down payment) a 30-year conforming mortgage is still at least 7% when all of the various add-on charges are included (the boilerplate rates advertised are for mortgage applicants with a FICO of at least 740 using a 20% down payment – not the majority of applicants).

Moreover, the economy continues to contract and the layoff cycle is just warming up. Mortgage delinquency and default rates are moving higher, a trend which will accelerate going forward. At some point the stock market will begin to incorporate reality in to homebuilder valuations, which should silence the housing market promoters who are trying to squeeze the last few nickels out of the housing market before it collapses again.

Time To Short Shopify $SHOP Again

The following commentary is from the May 7th issue of the Short Seller’s Journal. Follow this link to learn more about this newsletter: Short Seller’s Journal info.

SHOP reported its Q1 numbers Thursday morning. Revenue was in-line with expectations. SHOP’s revenue growth was driven by the growth in the Merchant Solutions segment, which provides payment processing, shipping, fulfillment and working capital loans to merchants that sign-up for this platform. But the stock shot up 24% on Thursday, incredibly, because the Company unexpectedly reported net income vs the consensus estimate for another loss. As discussed below, the “net income” is phantom GAAP non-cash “net income.”

The market didn’t care about the $193 million operating loss, which was nearly double the operating loss from Q1 2022. The source of the positive GAAP net income was “other income” of $269 million. In digging through the footnotes, the source of this “other income” is “unrealized gains on equity and other investments” net of other investment noise. $215 million of that unrealized gain was non-cash per the reversal of that amount in the statement of cash flows. This reeks of SHOP’s management playing the GAAP earnings management game in order to “surprise” the stock market with an earnings report that showed net income.

From SHOP’s Q1 10-Q – truncated income and cash flow statements:

While revenues in the Merchant Solutions segment grew 31%, the cost of providing merchant services grew 45%. This is why the gross profit grew just 12.3%. Most of that positive “growth” can be explained by price inflation. However, SHOP’s gross margin declined YoY in Q1 from 53% to 47.5%. This likely reflects the implementation by management of aggressive promotional pricing deals to attract new merchants. Many will drop off when the free subscription period expires. Additionally, SHOP competes with AMZN and other online retail sales platforms like ETSY, OSTK and W. The big drop in SHOP’s gross margin also reflects cut-throat competition in the consumer products e-commerce space as e-commerce platform providers fight for a shrinking revenue pie.

SHOP also announced that it is selling its logistics division to Flexport. Flexport is a private logistics company on which there is not any material financial information. “Logistics” is a fancy name for a company that delivers products from the seller to the buyer. Trucking, rail, FedEx and UPS are examples of logistics companies. The high cost of free delivery deals – i.e. fulfillment – is one of the primary reasons AMZN is unable to achieve material profitability.

SHOP sold its logistics division in exchange for a 13% equity interest in Flexport. The move enables SHOP to migrate a division that loses money away from its GAAP financial statements. It also allows SHOP to cover up the fact that it paid $2.1 billion in cash and stock for the logistics business just a year ago. A year later it sold the business for far less than $2.1 billion and SHOP received hard-to-value stock in a private company that needs to raise capital intermittently to fund its operations.

Other than disclosing the payment of 13% of Flexport’s private equity, the actual dollar value assigned to the deal was not disclosed. This means that the value received by SHOP is not a material amount in relation to SHOP’s balance sheet. “Material” in GAAP is defined as 5-10%. SHOP’s balance sheet is $10.7 billion. Thus, the amount that would be assigned to the transaction was likely under $1 billion and possibly less than $500 million. Whatever the amount, it was paid in Flexport’s private, illiquid shares and may never be monetized. I will be curious to see if SHOP takes a charge against income in Q2 for the difference between the $2.1 billion paid for the logistics business and the amount of money it lost selling it to Flexport.

Along with the sale of the logistics business, SHOP announced that it is cutting 20% of its workforce. This move to cut operating costs reflects management’s outlook for difficult business conditions the rest of this year.

The market’s reaction to SHOP’s non-cash phony net income in Q1 is a reflection of the degree to which the stock market has reverted back to the silliness that was occurring in the run-up to the Nasdaq’s peak in November 2021, when the bear market in the Nasdaq began. The RSI is the most overbought since early November 2021. SHOP faces strong economic headwinds going forward, particularly the dwindling disposable income of its customer base, a retail environment that is becoming more cut-throat as e-commerce retailers fight for a shrinking pie of consumerism and general economic weakness.

The Look And Feel of a Precious Metals Bull Market

The following analysis and commentary is an excerpt from the latest issue of the Mining Stock Journal. You can learn more about this newsletter here: Mining Stock Journal Information

It’s starting to look, smell and feel like a sustainable bull market may be unfolding. For the first quarter, gold rose 8.2% and silver was basically flat for the quarter but rose 15.6% in March. The mining stocks, generically using the GDX ETF as a proxy, rose 12.2%.

The chart above shows the price of gold and silver priced in U.S. dollars from 2001 to present. That is the chart of a secular bull market punctuated by cyclical ebbs and flows. The first bull cycle lasted from 2001 to 2011. It was followed by a bear cycle from 2011 to the end of 2015. In my view, the sector has been in a lateral “tug of war” that will be resolved by a historical move higher.

Several fundamental factors underlie the current – and my expected – performance of the precious metals sector, not the least of which is the continued massive accumulation of physical gold by non-western Central Banks (per the World Gold Council data). Eastern hemisphere Central Banks, including the CBs in countries that make up the BRICs alliance (Brazil, Russia, India, China) hoovered physical gold bars at a record pace in 2022 going back to when the records began in the 1950’s. The pace of buying continued in Q1 2023 per a recent report from the World Gold Council.

It would appear that the accumulation of gold reserves is part of a plan by the non-western Government geostrategic and economic alliances to reincorporate gold into the monetary system by using gold to back a new reserve currency that will be an alternative to the use of the dollar as the only reserve currency. Indications of this have been surfacing for a few years, but intensified and accelerated after the U.S. froze Russian dollar-based assets held in western Central Banks. In fact, earlier this month, Brazil’s President, Luiz Lula da Silva, joined Beijing in calling on “developing countries to work towards replacing the US dollar with their own currencies in international trade…” (The Financial Times).

As significant, if not more significant, after a recent trip by China’s Xi Jinpin to Saudi Arabia, where he was greeted by the Crown Prince of Saudi Arabia (Mohammed bin Salman Al Saud, or “MBS”), it appears as if China and MBS struck an agreement to start settling oil trades between the countries using the Chinese yuan. The significance can not be understated. The exclusive use of dollars to settle oil trades globally – the “petrodollar” – has been the basis of U.S. global economic dominance and the foundation of the dollar as the sole reserve currency since the early 1970’s. India has also been buying oil from the UAE and settling the trade in dirham (the UAE’s currency). Interestingly, in late March France’s Total Energy sold LNG (liquid national gas) and settled the trade using yuan.

As the world shifts away from using the dollar as a reserve currency, I believe a competing reserve currency will be used. A transition of the global monetary system away from the dollar and toward a new reserve currency is extraordinarily bullish for the price of gold and silver, particularly the price of each metal priced in dollars.

Another development that is exceptionally bullish for the precious metals sector is the emerging bank crisis in the United States and Europe. The sudden collapse of Silicon Valley Bank and Signature Bank was presented in the mainstream media as a limited bank crisis confined to regional banks. But SVB was the 16th largest U.S. and Signature was the 29th largest bank. What was particularly shocking was the suddenness and swiftness of the collapse of these two banks. The demise of these two banks drew attention away from the collapse of Credit Suisse, which was one of the largest banks in the world and a designated GSIB (global systemically important bank).

Because of the inter-connectivity of big banks globally via derivatives, GSIB accidents do not occur in isolation. I expect more big bank blow-ups will occur. But what stands out to me was the alacrity with which the Fed printed more money to bail out the uninsured depositors of SVB and Signature in an effort to prevent a run on the banks in general. While not termed “QE” or “a bailout,” that is exactly what occurred. The Fed’s balance sheet jumped in size by $400 billion over a two week period.

Similarly, the Swiss Government gave UBS a $100 billion safety net to absorb Credit Suisse. While these official monetary inventions may have temporarily stalled the onset of a bigger crisis, they invariably did not fix the underlying systemic problems. The point here is that I expect several more large banking system accidents and a correspondingly massive quantity of Central Bank money printing to prevent a western hemisphere financial system collapse. This will be extraordinarily bullish for the precious metals sector.

Along the same lines, I also expect that the Fed will be forced to pause hiking interest rates before autumn and, probabilistically, will have to start cutting the Fed funds to address the severe economic recession emerging. The Fed has yet to raise interest rates high enough to pull the negative real interest rate (Fed funds minus the rate of inflation) into positive territory. Negative rates are one of the primary drivers of the price of gold (and silver). If the Fed is forced to cut rates, I believe that the ensuing bull move in the precious metals sector will dwarf the bull move in the sector that occurred between late 2008 and mid-2011.

The sector is extremely over-extended technically per the charts and the HGNSI. The banks have built up a big short position in gold contracts and I think the markets are going into another “risk-off” down-cycle. Hedge funds and other short-sighted traders treat paper gold/silver and mining stocks like a risk-on trade. If the big banks are unable to engineer a material pullback in the prices of gold and silver, a possibility that not beyond consideration, the signal sent to the market could trigger a move in the sector that takes everyone, even the staunchest of long-time gold bugs, by surprise.