A-Mark (NASDAQ:AMRK) is an obscure, California-based provider of finance, storage and transportation in the high margin global precious metals space. The company sports a 65-day average volume of just under 56,000 and a 4.6 million public float. About 50% of the company’s stock is held by roughly 6 people. Unabashedly, A-Mark’s growth equation depends on market volatility. Without question, COVID-19 disruptions in the greater economy worldwide have created a fecund environment for market volatility to date — and an absolute boon for company fortunes. And with much of the world still facing spiraling COVID caseloads, the possibility of new lockdowns and further economic dislocation, market volatility will likely be with us for the foreseeable future.
The company’s year-end FY20 numbers simply dazzled. Revenues increased 96% to $1.67 billion for the quarter through the end of June from $850.2 million YOY. Gross profit went to $28 million, up from $6.5 million at a cool 331% upward thrust. Operating income soared to $17.8 million against a negative $2 million showing YOY. Earnings per diluted share went to $2.49 from a net loss of $0.12/share for the period. And to top off an extraordinary finish to FY20, the board of directors authorized a $1.50/share special dividend that was paid out to stockholders of record as of 21 September.
Figure 1: A-Mark, the US dollar and the 10-year US Treasury against the S&P 500
Of course, it is no accident the company’s (green/red line) fortunes turned decidedly to the upside as the S&P 500 (grey area) sketched out its trough on the 23rd of March. The company’s mainstay, the sale of proprietary silver and gold coins and products produced in majority-owned facilities, saw prices hit YTD lows of $11.77/ounce and $1,479/ounce, respectively, several days prior. Silver futures would hit a high of $29.26 on the 10th of August for a gain of 149% trough to peak. Gold futures would peak at $2,069/ounce on the 6th of August, up 49% from its March low. A-Mark would soar 221% to $25.85 over the period, a pace that kept the share price comfortably above its 50-day EMA (red line) and well above its 200-day EMA (blue line). The market good times continue with the company up 318% through Friday’s market close. The spread (yellow line) between the US dollar (cyan line) and the 10-year Treasury (orange line) arguably delineates the company’s forward growth potential through the end of the year and beyond (see Figure 1, above).
Or does it?
One should likely be wary of a thinly traded stock with average daily dollar volume under $8 million. Central banks became net sellers of gold in September as the yellow metal sketched out its August market high. Gold has subsequently fallen just over 8% from its August peak through Friday’s market close. A-Mark’s glad tidings from investor angst over COVID-19 economic disruptions worldwide now see central banks selling gold to free up monetary resources to backstop markets, combat job loss and fund safety-net and fiscal stimulus programs. Little is left to the imagination as to the impact of COVID-19 on the Federal Reserve’s balance sheet which has jumped a whopping $2.6 trillion through the end of August.
Of course, gold’s hedging potential depends upon the nature of the risk. When stocks fall, investors want an offset, an insurance package, to mitigate further market loss. March’s market crash saw gold, corporate bonds, as well as equities being liquidated rapidly in sync as investors struggled desperately to meet margined positions in the face of an acute liquidity squeeze. At the same time, the price of US treasuries and the demand for US dollars worldwide soared as investors large and small piled into traditional safe harbor vehicles. Cash was king — and was nowhere to be had in sufficient quantities to soften such a glancing market blow. But by the opening bell on the 24th of March, major indices were up sharply on news of the Federal Reserve earmarking a $2 trillion backstop of most US market activities. The market scratched out a 9.4% gain on the day after shedding 939 points over 24 consecutive trading sessions.
Gold also likes inflation that ties into broadly-based economic growth. A prime mover of gold prices are real interest rates. Market-based measures of inflation, TIPs, and the price of gold tend to move in opposite directions. When gold prices peaked in August, it was no coincidence that the yield of TIPs reached a new YTD low. With the Federal Reserve’s commitment to keep interest rates at zero bound for the foreseeable future, higher inflation triggered by government spending on safety net and stimulus programs could drive real interest rates even lower and, correspondingly, drive yields to the downside on market-based measures of inflation, such as TIPs. Accordingly, gold prices would likely move to the upside.
Yet higher inflation is also good for stock prices, suggesting a strengthening economy and a wider consumer demand for goods and services.
Gold prices are more consistently moving to the upside when the economy measurably weakens. This makes bond yields unattractive while the weakening economy provides strong headwinds for growth stocks. All of this usually provides the necessary fodder for the Federal Reserve to cut interest rates. The stagflation of the 1970s saw gold prices reach their all-time high in January 1980 — a threshold adjusted for subsequent inflation that still stands today.
Such inflationary conditions are likely far from the current economic pale. Contrary to economic conditions in the 1970s, the current downside pressure on inflation is demand, rather than supply, based. Thanks to Fed backstops, the S&P 500 is up just shy of 55% since scratching out its 23 March trough. The expectation here is more likely to see gold and stocks moving in similar, rather than different, directions moving forward until the downside pressure on inflation exerted by weak demand for goods and services in the greater economy reverses.
Figure 2: Gold Continuous Futures Contracts, the US Dollar and the 10-year Treasury
While gold futures (green-red line) are down about 8% from their August high, falling slightly below its 50-day EMA (blue line), they remain comfortably above its 200-day EMA (red line) for the time being. The 10-year Treasury (purple line) has remained largely flat since March while the US dollar index (brown line), though spiking through much of March in deference to its traditional safe harbor responsibilities has, by early June, trailed off considerably as gold prices streaked to its August heights.
A-Mark sold 669,000 ounces of gold through the three months ending 30 June which was 32% more QOQ and 91% more YOY. For FY20, the company sold 2.2 million ounces of gold for a 21% increase YOY. The spread (yellow line) between gold and the dollar makes the argument that gold has further potential to the upside as governments continue the struggle against the coronavirus into the New Year and beyond (see Figure 2, above).
A-Mark’s silver story is even more revealing. A-Mark sold 29.6 million ounces of silver in the three months ending 30 June. The total was up 15% QOQ and up a whopping 136% YOY. For the entirety of FY20, the company sold 90.4 million ounces of silver, up 34% YOY. The period resulted in a 1.68% bump in premium spreads above spot prices, highlighting the highly favorable market conditions of the period.
The company’s SilverTowne Mint in Winchester, Indiana, reached maximum capacity of 500,000 ounces per week in the first week of April. That capacity jumped from January and February time frame when capacity hovered around 150,000 ounces/week. Of course, the increase in capacity meant the flow of raw material to SilverTowne had to ramp up proportionately, despite COVID-19 disruptions from supply chain constraints and COVID-related restrictions mandated by local, county and state governments. Incredibly, the Mint was able to begin round-the-clock shifts in April — precisely at a time when COVID-19 was shutting down almost all logistical connections between the Mint and market players in the greater economy. Silver bars were making the trip from London to company storage facilities in Las Vegas and then on to Singapore and from New York to production facilities in Winchester when planes stopped flying and Brinks trucks stopped driving. The effort of the past six months sets the company up to do even more volume and to acquire market share moving forward, which ties into continued investor angst about a second wave of COVID-19 as the winter months approach across the advanced economies of America, Europe and Asia.
Figure 3: Silver Continuous Contracts, the US Dollar and 10-year Treasury
As with gold, silver (green-red line) peaked in early August and has dropped in the interim period by about 15% to just below its 50-day EMA (blue line) through Friday’s market close. Similarly, the metal remains comfortably below its 200-day EMA (red line) support level. Silver’s positioning with the 10-year Treasury (purple line) and US dollar (brown line) creates a sizable spread (yellow line) for further price expansion to the upside through the end of the year and even beyond.
A-Mark’s share price should cross $40/share by year-end.
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Disclosure: I am/we are long AMRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.