This hedge-fund manager has an unusual way to trade gold's breakout rally

By Barbara Kollmeyer

Critical information for the U.S. trading day

A post-eclipse hangover? Stock investors are seemingly on the sidelines, a day ahead of inflation data.

Meanwhile, gold is punching out its umpteenth high for the year on Tuesday, and our call of the day, from Praetorian Capital Management founder Harris Kupperman, offers a fresh way to profit from that.

Kupperman, who expects rising domestic and global tensions to drive volatility this year, is less excited by gold itself. "Capital flees and effectively goes to sleep in the form of precious metals - until stability returns, and capital can be returned to the economy again," says the hedge-fund manager in a blog post.

He isn't a fan of miners, as he sees little leverage to the hard asset - one view is that when gold prices rise, profits for mining companies also climb.

Kupperman, who correctly called the 2022 tech meltdown, is focused gold's role as a gauge of global fear levels. "I want to play the fear - the visceral and instinctual panic into metals and out of paper. I think that's the better trade-especially as the elites find ways to cap the price of gold, or at least divert people's attention from it."

For that, he flags one stock - A-Mark Precious Metals (AMRK), a "dominant wholesale dealer in precious metals, with a substantial presence in sales to retail consumers, along with ownership in two mints." (Kupperman discloses in the blog post that he is "long shares of A-Mark.")

"They're fully hedged against metal price moves, and instead earn a spread between the price that they pay and the price that they charge customers, usually referenced to the spot price," he said.

A-Mark sold 2.6 million ounces of gold and 156 million ounces of silver in 2023, for total revenues of $9.287 billion, he notes. The company functions "like an exchange," prospering on volumes, with elevated capital returns funding deals, customer growth, buybacks and dividends.

Its web traffic has spiked in the past on various crisis - COVID, lockdowns, the U.S. Capitol attack, Russia's invasion of Ukraine, last year's banking upheaval, he says, adding that crisis leads to demand for metals and expanding spreads over spot prices, good for A-Mark.

From fiscal 2021 to 2023, A-Mark earned roughly $7 per share after adjustments, including a stock split. The past three more mellow quarters, saw earnings averaging around $2.50 to $3 per share annually, which he suggests is a baseline for the company.

A close of $32.73 on Friday implies an 11 to 13 times earnings multiple for this business, "which simply seems low...given the amazingly high returns on capital that the business has had over the years, even during periods where results have been weaker," he says.

Given that the demand for metals is set to expand, he thinks A-Mark can earn up to $10 a share. And with that, a 25-times multiple - implying $250 a share - isn't far-fetched, given royalty companies with "substantially higher risk profiles" trade on higher multiples, he says.

"In my mind, AMRK trades cheaply, only because most investors do not yet know about it or associate it with the preferred way to 'play' gold," he said, adding that owning a miner makes no sense when an investor can own a precious metals exchange and prosper off increased volumes and spreads.

"When this reality becomes better known, I think that AMRK will trade at a premium multiple to the sector, especially as the market cap expands, allowing it to be added to additional passive indexes," he says.

Read: Bank of America says the copper supply crisis is here

The markets

Stocks SPX DJIA COMP are mostly steady as Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y back up further. Gold (GC00) is up $22 at $2,374/oz. Bitcoin (BTCUSD) is trading at $70,813.

Read: Treasury yields aren't acting like the Fed is done hiking interest rates

And: European Central Bank to stand pat this week but faster-than-the-Fed rate cuts may hit euro

The buzz

The National Federation of Independent Business optimism survey was reportedly the worst since 2012:

Tesla (TSLA) has been moved off the bearish list at financial firm Baird thanks to news of the robotaxi debut later this year.

President Biden is meeting Japan's prime minister in part to discuss differences on the U.S. Steel (X)/Nippon Steel (JP:5401) deal.

Shares of BP (BP) (UK:BP) are climbing after the energy giant forecast a boost to first-quarter performance thanks to higher oil and gas production.

Maxeon Solar Technologies (MAXN) is down 2% after the solar power tech group forecast a loss in preliminary results.

Defending its student-loan relief plan, the White House has once again weaponized PPP relief.

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The chart

Jeffrey Saut, chief investment strategist at Saut Strategy, preaches caution over a recent high (March 28) for the Dow industrials DJIA. The Dow Jones Transportation average DJT has failed to follow up with a high of its own, "which is a Dow Theory upside noconfirmation and a red warning signal," Saut tells clients in a note.

The 1900s-era Dow Theory strategy dictates that the DJIA's direction is higher if two averages - usually Dow industrials and the transportation index - reach new highs in the same short period. As that hasn't happened, Saut says he will remain cautious of stocks.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   TSLA  Tesla 
   NVDA  Nvidia 
   TSM   Taiwan Semiconductor Manufacturing 
   GME   GameStop 
   DJT   Trump Media & Technology 
   AAPL  Apple 
   NIO   Nio 
   AMC   AMC Entertainment 
   TLRY  Tilray Brands 
   AMZN  Amazon.com 
   AMD   Advanced Micro Device 

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-Barbara Kollmeyer

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04-09-24 1031ET

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