Friday, 16 February 2024

By Kiryll Prakapenka Editor, Fat Tail Daily

[4 min read]

Dear Reader,

Did you hear Bitcoin is edging nearer to all-time highs?! It’s ‘only’ 30% off November 2021’s record!

Did you hear this chipmaker called Nvidia is worth more than Amazon and Google?!

Did you hear artificial intelligence is going to be huge?!

Yeah. Duh.

But did you hear gold explorers might be in deep value territory?

Uh…

Who the hell is talking about gold stocks now?

Brian Mr Gold Chu.

I’m convinced Brian is the guy in the Aussie gold space. He knows all the deposits. All the grades. All the companies. All the economics.

(In this week’s What’s Not Priced In, for example, he reeled off all the recent mergers off the dome for three minutes straight. He’s on top of it all).

And what’s Brian up to?

Hunting value among the gold explorers. That’s where he’s seeing the bargains. Brian is more bullish on the juniors than the producers.

This week on What’s Not Priced In, he explains why. Other topics discussed:

• Resilience of AUD gold price
• Divergence between Aussie gold price and ASX gold stocks
• Brian’s proprietary Speculative Gold Stocks Index shows explorers in the dumps
• Thoughts on Silver Lake Resources and Red 5 merger
• Will we see more mergers and acquisitions in the gold sector?
• ‘Disappointing’ December quarter results for producers like Evolution Mining
• Outlook for ASX gold stocks and why Brian is liking the explorers
• Deep value ‘net-net’ stocks among the juniors

Proprietary methods

What do good investors have in common?

Sound systems.

Sound logic.

Unique insights.

An edge.

I’ve written about this before. Outsize returns jump from out-of-the-box thinking.

You can’t expect better returns than the market by thinking like everyone else.

So where are edges found?

An investor can interpret readily accessible data differently to the herd.

Or find data few are privy to.

Or construct metrics that do a better job of forecasting than established ones.

Or piece together disparate data points into a coherent argument few appreciate.

In Brian’s case, he loves generating proprietary data. That gives him something the market doesn’t have.

For instance, Brian, along with his analyst, constructed his Speculative Gold Stocks Index. It tracks the performance of Aussie juniors.

What it shows is bleak.

Despite the steady rise of the Aussie gold price, Aussie gold stocks have floundered in recent years.

Especially the juniors.

Why have gold stocks underperformed?

Why the divergence?

I posed that question to Brian. We spent a good chunk of the episode pondering reasons.

Macro popped up.

If you’re listened to any episodes this year, you’d know what Greg Canavan thinks of macro now.

Brian heard our misgivings about the utility of macroeconomic pottering. But he pushed back.

Gold, he said, is all about macro. But it doesn’t mean you forget the fundamentals. If you’re buying gold stocks, their business is your business.

As Brian said to me:

‘The mainstream narrative drives sentiment in gold stocks, more so than gold as we've seen the last three years. Meanwhile, the most astute gold stock investors will focus on the micro by building up a portfolio for the right time when the macro aligns and gold stocks explode, especially the explorers.’

The business side of gold mining is another reason for the divergence.

Gold miners ride the volatility of their underlying commodity. But they also ride the volatility of their operations.

Gold stocks have staff.

Gold stocks have expensive equipment.

Gold stocks have ore bodies that can be recalcitrant.

Gold stocks also have market expectations to handle. And with a high Aussie gold price, expectations were high.

High expectations can be an albatross. Wherever there are expectations, disappoint is not far behind.

Even Brian was disappointed by the December quarter results posted by the producers.

Unwarranted pessimism leads to deep value

But he thinks the market has slid into pessimism now. Unwarranted pessimism.

And this souring sentiment is creating deep value, especially in the explorers.

Brian is even finding some ‘net-net’ stocks in the junior space.

He noticed some explorers trading at negative enterprise value. Meaning you can buy these companies for less than the cash they have on the balance sheet, net of debt.

This is rare.

And Brian wants to capitalise.

So I’ll leave the final word to him:

‘I can’t quite think of anything the market finds beneath contempt right now than gold stocks.

‘More specifically, gold explorers and early-stage developers.

‘The market doesn’t hate it. It’s beyond that. You only hate something you care about, right?

‘The market treats them as if they don’t exist.

‘Well, they’re all good reasons for people to ignore them.

‘And THAT is why I’ve been buying.’

Brian is holding an event next week where he’ll make the case for gold explorers.

If you want to attend, and ask questions (there will be a Q&A), you can register here.

Enjoy the episode!

Regards,

Kiryll Prakapenka,
Editor, Fat Tail Daily

Kiryll Prakapenka is a research analyst with a passion and focus on investigating the big trends in the investment market. Kiryll brings sound analytical skills to his work, courtesy of his Philosophy degree from the University of Melbourne. A student of legendary investors and their strategies, Kiryll likes to synthesise macroeconomic narratives with a keen understanding of the fundamentals behind companies. He’s the host of our weekly podcast What’s Not Priced In, where he and a new guest figure out the story (and risks and opportunities) the market is missing to give you an advantage. Follow via your preferred channel and check it out!

By Bill Bonner Editor, Fat Tail Daily

[2 min read]

St. Valentine’s Day…and Ash Wednesday, the first day of Lent

The latest news:

‘(Reuters) — …hotter-than-expected consumer inflation readings smashed market speculations of an early start to interest rate cuts this year.

‘A Labor Department report showed the Consumer Price Index (CPI) rose 0.3% on a monthly basis in January, above the 0.2% increase expected by economists polled by Reuters. Annually, it increased 3.1% versus the 2.9% estimated growth.

‘Excluding volatile food and energy components, the core figure rose 0.4% month-on-month in January, compared with the estimated 0.3% rise. Annually, it gained 3.9% versus the estimated 3.7% increase.’

Counting on a rate cut this spring? Well, you can forget it. Inflation is not going down as fast as speculators hoped. The fix was not in, or at least not as firmly as most people thought.

The biggest danger most investors face is the risk of a Big Loss…a loss so big they’ll never recover from it. And the most likely source of a big loss now is the bubble in the Magnificent 7. Nvidia, for example, is thought to be worth more than the entire energy sector. The Magnificent 7 are worth more than the entire output (GDP) of China, the world’s second largest economy.

When these facts change, many people are going to take the Big Loss.

The Debt Balloon

Meanwhile, the whole economy is headed for a Big Loss, too. Earlier this week, we looked at the ‘most predictable crisis ever’, the ballooning US debt.

Today, we put it in perspective. 

As we saw yesterday, a society inevitably faces challenges. It has to protect itself from other societies. It runs out of parking spaces. Its farmers are upset with low prices they get from their corn and wheat. One thing after another.

The elites try to solve these problems…inevitably fixing them in a way that increases their own wealth and power…and sets up the next problem.

They station troops all over the world, for example…like staking lambs out in a clearing in order to get a good shot at the wolf. Then, they need to ‘protect their troops’ and show the world that they are not to be trifled with.;

Or, seeing the world confronted by a climate crisis, they send money to their friends with ‘green’ solutions…while restricting the ability of honest energy producers to provide the juice their customers want.

All the fixes impose costs. Some of the costs show up in the form of higher prices (and even higher taxes). Other costs are largely invisible — shrinkflation on an economy-wide scale. The quality and quantity of goods and services declines. People get less for their time and their money.

Lost Earnings, Lost Output

Thoughtful economists have wondered for years why the working class has had no real pay increase in half a century. How was it possible? The US economy had every advantage — capital, skilled labour, abundant engineers and entrepreneurs. Why did labour rates/hour stop rising after 1975?

The answer is in front of us — in the ‘flation’ we’ve been describing: higher costs (the Fed has actually tries to keep prices rising by 2% per year)…and a shrunken real economy, where more and more output is directed, by the feds, to activities that don’t really pay off. Output goes down…along with quality.

The most costly of all peace-time fixes in history took place in 2020-2021. In response to the challenge posed by a virus (which turned out to be insubstantial), the Trump administration and state governors closed down much of the economy…and then handed out trillions in newly-created money, for a total cost (lost earnings and output as well as direct federal outlays) of $14 trillion. Fortune:

‘The economic toll of the COVID-19 pandemic in the U.S. will reach $14 trillion by the end of 2023, our team of economists, public policy researchers and other experts have estimated.’

Big Loss Ahead

Almost all of that was imposed on the economy (unnecessarily). Some of it was passed along in the form of higher consumer prices, which consumers will pay for many years into the future. Much of the rest is now embedded in the US debt. In other words, the US debt represents the attempts by the elites to solve problems — real and imaginary — by shifting money and power to themselves in the present…while pushing the real costs onto future generations.

Known collectively as ‘the Swamp’ or the Deep State in America…’the Blob’ in England…Milei in Argentina calls them the ‘political caste’ — whatever you call them, they are the deciders who solve the problem, whether there is one or not.

And now, in most countries in ‘The West,’ they have solved so many crises that the whole system staggers under the weight of their solutions.

Big Loss coming soon.

Regards,

Bill Bonner,
For Fat Tail Daily