Gold and Miners Poised To Make a Big Run

Throughout history there have been many years and even decades when gold outperformed equities. The question I am going to ask is "is this time different?" I am particularly interested at looking at the 1970's when the U.S. had high inflation and low economic growth. The FED is tightening yet many economic indicators are slow to point to a full-blown recession. Inflation has been hard to tame for Jerome Powell thus far. Stagflation is a probable outcome in this economic scenario. There is also the increasing potential for geopolitical events as it relates to oil as there is tension between eastern and western nations.

So far, many parts of the economy have been unprecedently resilient to higher rates. Housing has been one of them as many people are buying from fear of missing out and moving to cheaper cities. The second period in history that saw gold outperfrom equities was 2000 to 2012. This was following a long secular expansion and tech bubble collapse. We now are at the end of a long expansion and crypto and Bitcoin bubble burst.

Gold also did well following the 2008 banking panic but I am particularly interested in the years when gold rose as stocks fell. These are the years in the 1970s and 2001 to 2003. So, I see a couple likely scenarios economically. The FED tightening causes a recession that is mild or severe. If it is mild I see a possibility of inflation sticking around like the 70s. If it is severe and there are major bank panics it will likely be resolved quickly as 1907 was with J.P. Morgan helping bail out Trust Company of America and the 2008 panic were. In 2008 much of the deflation came in less than one year as housing collapsed and banking products failed. The Government in 2008 was fairly quick to inject capital and launch QE in 2009. Gold benefited from that.

In 2009 I predicted the pivot point on gold and was bullish right before its historic run. I said, "This chart sends a powerful signal. It is saying that it is more than likely that gold the commodity will continue higher. Let me rephrase that. Very likely." I had noticed a triangle formation on the gold chart.



What Can We Learn From The Past?

Let's switch gears and go back to the 1970's. It was a period of much uncertainty politically and economically. The highlighted regions show two periods where stocks fell and gold rose. Even the entire decade had stocks losing to gold. Gold traded for $35 in 1971 and went to over $850 returning 2,300% in ten years.

Next let us view the 2001 recession and gold and stocks. We see yet again periods when gold rose as equity indices fell in 2001 to 2003. This was during the recession of 2001 when unemployment rose from 4% to 5.5%. Then Fed Chair Alan Greenspan kept interest rates historically low during his tenure.

Here is a longer-term chart of equities and gold.

The gold market is now signaling extreme strength as the daily chart is showing a very powerful consolidation pattern. It is a bullish triangle formation as you can see below. Gold miners are alreading breaking higher from this consolidation like Franco-Nevada (FNV). I am currently long the gold ETF GDX calls. Other liquid ETFs include VanEck Junior Gold Miners ETF GDXJ and SPDR Gold Trust GLD. GLD doesn't hold physcial reserves though. Sprott Physical Gold Trust PHYS is a gold etf that holds actual gold.

Final Thoughts

Everyone is scrambling to find cheap gold mining stocks. As gold is consolidating at levels near last years highs I see a good possiblity of different scenarios. Over many recent years gold has been a "risk on" trade. Meaning it usually will only rise when stocks and other assets do. There were a couple days during the most recent banking troubles, however, where gold and Bitcoin had positive days while equities fell. Currently, gold is surpassing Bitcoin in this potential "flight to safety."

I see it rising as it did in 2001 and 2009 if the FED ends up reacting to a recession with QE like 2009 or with another extreme loosening like in 2001. The odds are stacked that we are going to get a recession with historic FED tightening and yield curve inversion. The other scenario is a recession with elements of inflation sticking like the 1970 and even a weak U.S. Dollar.

Whether one sees it as a stagflationary safehaven or an inflation hedge on a declining stock market. I see gold as a historically wise investment vehicle at this time and for many years to come as we sort out this economic cycle. It may start making new highs very soon or it may take months before the momentum starts but I see gold moving higher over the next year. Increasing allocation to gold just makes sense.

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Full disclosure: I am long GDX call options currently and may take positions in stocks mentioned. I have no physcial gold holidings. I have approx. two dozen silver coins.

charts courtesy bullionvault.co.uk and stockcharts.com

Two Interesting Deep Values

Here we go with the two deep values! I recently ran a screen looking for a particular kind of deep value stock. I was looking for either sub net tangible asset value or net current asset value. I screened out Chinese, semi’s, and biotech as these in my opinion tend to be less reliable as investments in the micro and small-cap space.

One of the more interesting I found was Crimson Wine Group, Ltd. (CWGL). I’ve rarely seen beverage companies below net tangible or NCAV before. A couple good ones that come to mind from years ago were Caribou Coffee and Coffee Holding when they were briefly below net tangible asset value. Caribou Coffee was bought by private equity after I wrote about it. I’ve never seen a wine company near deep value level.

Crimson Wine is currently trading for 59% of net tangible asset value. It is a wine wholesaler and direct to customer. From the most recent SEC EDGAR filings we have net tangible asset value of $221.4 million and market cap of just $133 million. Net current asset value is not far away at $72 million. They haven’t diluted with any recent offerings the past couple years as shares outstanding has been stable and slightly down. Cash has been stable on the balance sheet also. Cash is slightly up over the past couple years.

The company has had a slightly profitable quarter in the last year. The share price has been up and down. The stock had a good run from fall of 2020 to summer 2021 and has been down since. I always like to see a stock price that has had some kind of history of share price appreciation. So many small and micro-cap companies never have any history of stock appreciation so it is always nice to see the market can indeed react to positive performance. The company had positive free cash flow for the trailing 12 months ending Q3 last year of $8 million.

The second stock is Save Foods, Inc. (SVFD). It develops and sells eco-friendly green treatments for the food industry to enhance food safety and shelf life of fresh produce. This one is a small micro-cap with a market cap of $5.3 million. Net current asset value is $6.63 million. They grew revenue a whopping 88% from 2020 to 2021 although there is not an annual net profit in the last three years. Cash has been stable the last three years, however, shares outstanding has been diluted. From the second to third quarter of 2022 share count went from 2.8 million to 4.5 million.

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Disclosure: I currently have no position in either of these stocks.

Starting a Substack For Net Current Asset and Deep Value Stocks

I am starting a substack for strictly stock analysis of deep value net-net's and net tangible asset stocks. Here is my Substack. Here are a couple of the most recent deep values I came across from my screening. This is the first round of interesting sub NCAV or net tangible asset value stocks. Screen excludes Chinese, semis, biotech. In millions. These figures and for the ones going forward I will be getting the most recent numbers via the SEC.gov Edgar search database.

CWGL $221.4 NTAV, $72 NCAV with $133 market cap

SVFD $6.63 NCAV $5.3 market cap

AOUT $105.4 NCAV 115.5 NTAV $124 market cap

Market Direction

I'm watching the major indices very closely day to day. Fundamentally the economy is resiliant in the face of FED rate moves not seen in decades. History shows that when the yield curve is inverted as long as it is there is a recession. I believe we had a recession in Q1 and Q2 of last year as GDP went negative two quarters in a row. That is the time tested measure of a recession. The definition of a recession was tinkered with but to me we had a mild recession thus signaling the effect of the rate hikes.

I think many bears are ignoring that possiblity that the recovery was quick and rates were not high enough to bring a double dip recession. I don't know if we will get another this year but it seems it is going to take much higher rates to bring it about. The Covid stimulis and FED action was massive and it appears underated. It is very likely PE multiples are now high as they were in 2009 also because the market is forward looking. It very well could be that growth will continue even with rates at current levels.

One thing is for sure the economy is different now with secular labor and supply chain issues. Work from home is still common with many companies. Maybe all this has something to do with why the economy keeps spurting along. Housing has been resilent too with rates high. The bear thesis doesn't make sense if employment is still low and the housing market ok.

Technically, the market is uptrending currently and many support levels were found on the October low last year. I'm leaning more to major US indices going higher the next month or two but we shall see.

Coffee Holding JVA Stock Update A Net-Net

I've covered JVA on the blog for many years and shared my honest thoughts on the company. It's been so beaten down in this bear market it is now at .62% of net current asset value. In the past it would bottom out around net tangible asset value. This is one of those rarer cases where a profitable or recently former profitable company becomes a net current asset value stock.

If you are new to deep value the net current asset stocks get their attention because of famous investor Ben Graham who taught Warren Buffett. Net current asset value is a rought liquidation value of the whole company. Of course the true liquidatoin value is usually lower given the inventory and equipment and long-term assets are likely going to fetch less than on the books. They are usually priced so cheap for a reason too.

JVA is now merging with another company. Here is a piece of the SEC filing.

As a condition to the Merger, Pubco shall also acquire all of the issued and outstanding Delta securities from the Sellers in exchange for Pubco Ordinary Shares (the “Exchange” and, collectively with the Merger and the other transactions contemplated by the Merger Agreement, the “Transactions”).

As a result of Transactions, JVA and Delta will each become direct, wholly-owned subsidiaries of Pubco, with JVA stockholders receiving approximately $31.5 million (or 4.79%) worth of Pubco Ordinary Shares (the “Merger Consideration”) and Delta stockholders receiving approximately $625 million (or 95.21%) worth of Pubco Ordinary Shares (the “Exchange Consideration” and collectively with the Merger Consideration, the “Business Combination Consideration”), subject to certain adjustments, at an implied diluted value per share of $5.50.

The Business Combination Consideration may be adjusted if Delta closes certain acquisitions prior to the closing of the Transactions. The Merger Agreement also includes an earn-out to existing stockholders of Delta, consisting of $50 million of additional Pubco Ordinary Shares, which will be released to Delta stockholders if and when Delta achieves $70 million or greater of net income for fiscal year ending 2023. The company they are merging with is private so I don't know anything about them.

Disclosure: I have a position in JVA