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SX Gold & Metals Advisor
Profitable Investing in Mineral Resources

February 22, 2022

More Metals Join the Bull’s Parade
For the first time in recent memory, metals are looking good across most major categories. Base and precious metals are showing varying degrees of strength, while energy metals like uranium and lithium are trying to establish bottoms. Even gold is showing more sustained strength than we’ve seen in several months.

In the portfolio, we just added a new position in a blue-chip gold stock and have initiated an additional new buy in a platinum/palladium closed-end trust.

Feature Story: Fear Back in the Driver’s Seat for Gold

Gold has a growing number of fundamental and technical factors in its favor. Above all, its “fear factor” is predominant right now as the threat of war is thick in the air. Here we’ll discuss all the reasons supporting the short-term uptrend for the yellow metal. At the same time, I’ll explain that gold still doesn’t have enough support for an extended intermediate-term (3-9 month) upside run.

The main driver behind gold’s recent strength is no secret, namely the escalating tensions between Russia and Ukraine. In the latest development, the White House warned that a Russian invasion of Ukraine could happen “in a matter of days,” while the Wall Street Journal reported that Russia was possibly searching for a rationale to invade Ukraine based on alleged crimes against residents of the eastern Donbas region.

The rumors sent gold prices soaring, which begs the question: If the rumors of war being imminent fail to be realized, will the gold price collapse to its pre-rumor levels? There’s no doubt that news-driven moves in gold tend to be quickly reversed in the immediate term—especially if events fail to confirm the headlines. We’ve seen this happen in each of gold’s previous rallies, where headline-inspired jumps in the metal’s price quickly reversed.

This time around, though, gold has more going for it than just warmongering headlines. You’ll recall from previous discussions in this report that there are five factors that typically determine gold’s intermediate-term or longer-term trends. Whenever at least three of those five factors are favorable, that’s when a sustainable rising trend over several months is usually established. Of course, the greater the number of the five factors that are bullish, the stronger gold’s performance tends to be.

Let’s examine each of these five factors to see what message they’re sending for the bullion market. The first factor is the platinum and palladium market. Specifically, these two precious metals should lead gold’s rallies. If a gold rally gets started without leadership (or else strong participation) in platinum and palladium, then gold’s rally is on a tenuous footing.

Fortunately, the latest gold rally was preceded by unusual strength in both the platinum and palladium futures prices. While gold took a sharp dive in late January, platinum jumped 12% while palladium rose an astonishing 28%. This lets us know that gold’s latest rally is more than just a blip on the radar; it also explains why gold has already had one of its biggest rallies since the last major one in September-to-October last year.

The next critical factor is to see whether or not silver is confirming gold’s strength. As it turns out, silver has risen with gold but hasn’t kept pace with it. That’s not what we want to see, because a gold bull market that has legs should encourage speculators who want in to leverage a gold bull run by aggressively buying much cheaper silver. When silver doesn’t keep pace with gold’s rallies, the rally must be considered to be at least somewhat suspect. Granted, there’s still time for silver to “catch up” to gold, but if this doesn’t happen in the next few days then the current gold rally is likely to fail once the Ukraine-Russia fear factor wears off.

The third factor that’s needed to support an intermediate-term gold bull market is how well gold is performing relative to the U.S. 10-year Treasury yield index (TNX). Gold has historically had its best bull runs when the gold versus TNX ratio is rising in gold’s favor. But as you can see here, that’s not presently the case. This suggests that higher bond yields are still competing with gold for the attention of conservative investors, which isn’t ideal for an extended bull market for bullion.

tnx_02-22-22

Another factor that’s normally needed to support a substantial uptrend is for gold to outperform commodities in the aggregate. My favorite measure of how well the broad commodity market is doing is the CRB Index. And as you can see in the following graph, gold isn’t outperforming the broad natural resource market. I’ve noted in the past that gold’s performance versus the CRB is, in my opinion, the single most important factor that underlies a solid and sustainable gold bull market. We’re not there yet, however.

crb_02-22-22

A final consideration when evaluating gold’s five factors of relative strength is to ascertain its performance versus the broad equity market as measured by the S&P 500 index (SPX). This is where gold is showing most of its relative strength (below), for while the stock market remains in a downward trend, gold is posting its best performance versus the SPX since 2020 when the metal was last ascending.

spx_02-22-22

All told, only two of gold’s five factors are decisively favorable for a continuation of its latest rally. We should ideally see at least three of these factors line up, which hasn’t happened yet. To be fair, the silver factor might come into play in the next few days, which would confirm an intermediate-term buy signal for gold.

Nonetheless, that gold is decisively outperforming the S&P 500 is in itself a strong factor that normally supports a solid short-term (1-3 month) run for the metal. For this reason, I’ve recently added a major gold mining stock that tends to closely track the metal’s price and even outperform gold during rallies. But before we jump back into our favorite gold ETF, I want to see at least three of the above-mentioned five factors line up in gold’s favor.

What to Do Now
South Africa-based Gold Fields Ltd. (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of over 2 million ounces, attributable gold-equivalent mineral reserves of 52 million ounces and mineral resources of 116 million ounces. The stock typically outperforms the physical metal when gold is in an established intermediate-term rising trend. Gold Fields just reported that its earnings increased an eye-popping 22% to $890 million, or $1 a share, for 2021 compared to a year ago. Revenue of $1.8 billion, meanwhile, rose 8% in spite of higher production costs. Attributable gold equivalent production for 2021 was 5% higher from a year ago and above guidance, while all-in sustaining costs were $1,063 an ounce—well below gold’s current price of around $1,900 an ounce. The company said South Deep was the “stand-out performer” of 2021, with production increasing 29% on lower all-in costs. South Deep also generated cash levels that were up 157% from 2020, and there are plans to ramp up production at this mine to around 370,000 ounces by 2025 based on its consistent improvement. Looking ahead, management said it expects production to grow by an additional 20% to 30% over the next three to four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Additionally, Gold Fields said it will pay a final dividend of 2.60 rand per share, taking the total payout for the year to 4.70 rand per share. As mentioned in the February 17 alert, aggressive traders can nibble here or wait for a pullback. I suggest using an initial stop-loss at around 10.90. BUY A HALF

gfi_02-22-22

With inflation likely to persist at least through the first half of 2022, not only industrial metals but commodities in general should outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e. fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason I expect DBC—which is heavily skewed toward the energy sector—to continue to show relative strength. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. Maintain this stop for now. HOLD

New Recommendations & Current Portfolio

Silver Wakes Up, But Still Lags Gold
Last week I pointed out that the white metals platinum and palladium haven woken up, while silver continues to sleep. Now at least we can say that silver has woken up, but it still has a lot of ground to cover before it catches up with its sister metals platinum, palladium and gold.

While gold has managed to establish a stair-stepping pattern of higher highs and lows since December, silver hasn’t yet managed to achieve a higher peak. The metal’s failure to keep pace with gold is one of the reasons why we’ve allocated capital to platinum and palladium, while avoiding new commitments to silver.

Silver has a reputation of being the “poor man’s gold.” That is, due to its much cheaper price relative to gold, silver tends to outperform during gold bull markets. On that score, silver has a way to go before it matches gold’s performance during its latest bull run. (The gold price is just 1% under its 52-week high of $1,920 from last June, while silver is still 19% below its 52-week high.)

By contrast, the other white precious metals platinum and palladium are in a better technical state than silver in that both metals have made a series of higher highs and lows in recent weeks, while silver has languished.

For that reason, I recently placed the palladium ETF (PALL) on a buy. Palladium has benefited from the recent Russia-Ukraine tensions under the assumption that top supplier Russia’s palladium exports will be hindered by a full-on outbreak of hostilities.

In light of the improved performance in platinum, however, I’m going to recommend that we exit our position in PALL and move into an ETF that provides exposure to both platinum and palladium simultaneously.

The recent surge in platinum’s price is in part due to the Russia-Ukraine standoff, but mainly because of easing supply-chain bottlenecks in the automobile industry. The increasing availability of supplies for carmakers means higher demand for platinum, which is used in the production of autocatalysts (and is less than half the cost of palladium used for the same purpose).

What to Do Now
Traders recently purchased a conservative position in the Aberdeen Standard Physical Palladium Shares ETF (PALL), using an initial stop-loss slightly below 195 on a closing basis. I’m going to recommend that we sell this position at around a 4% profit based on a potentially better opportunity in the ETF mentioned below. SELL

Traders who want some exposure to the platinum group metals can purchase a conservative position in the Sprott Physical Platinum & Palladium Trust (SPPP). This closed-end trust invests in unencumbered and fully allocated good delivery (redeemable for metals) physical platinum and palladium bullion. I suggest using a level slightly under the recent low of 15.40 as the initial stop-loss for this trading position. BUY A HALF

sppp_02-22-22

Copper Miners Outperform the Metal
Copper mining stocks have benefited from the Russia-Ukraine military scare for obvious reasons. It’s no secret that copper is widely utilized in military applications; indeed, the U.S. Defense Department says it’s the second most widely-used material for the U.S. military.

So why is it that the copper price itself hasn’t kept pace with the average copper mining stock? The Global X Copper Miners ETF (COPX), which tracks the performance of some of the world’s biggest copper producers, has made a series of higher highs since last month, while the continuous copper futures contract price has more or less gone sideways so far this year.

copper_02-22-22

But with the war drums beating, shouldn’t copper be surging right now? Or is this a case of the copper market sensing that war is not, in fact, imminent? As I’m no geopolitical strategist, I can’t answer that question. What we do know, however, is that copper demand is increasing on the back of not only supply availability issues, but also because of increasing worldwide electrification and alternative energy investment trends.

Last week, S&P Global Platts published an interview with executives from copper-gold exploration company American Pacific Mining. CEO Warwick Smith said copper demand is increasing from rising demand in the solar and wind energy infrastructure spaces, as well as from the electric vehicle (EV) industry.

Smith noted that the White House will sell leases this year for offshore wind projects to be built off the coasts of New York and New Jersey, which could generate up to 7 GW of power for around two million homes. He added that the project will emphasize the use of domestic materials, adding that “one wind turbine uses 4 [metric tons] of copper.” He estimated that around 12,000 tons of copper would be used for the projects in total.

American Pacific’s Eric Saderholm, meanwhile, told S&P Global that copper demand has now reached 25 million tons, up nearly 50% from 2010. He projects this bullish trend to continue in the coming years. He further forecast that copper prices would remain stable between $4 and $4.75 per pound in the foreseeable future, with production costs remaining around $2.50 (March copper futures were last seen at $4.50).

On the international supply front, LMR copper stocks declined to 70,125 tons—the lowest since November 2005—as supply remains tight. Meanwhile, Reuters is reporting that MMG Ltd. may halt production at its Las Bambas, Peru copper mine after local protesters blocked a key road used by the Chinese-owned miner. An indigenous local community contends that the firm’s mining activity has negatively impacted crop yields and has killed livestock.

MMG said mining would be halted on February 20 if the road block doesn’t end.

What to Do Now
In view of copper’s improving near-term fundamentals, participants who wish to have some exposure to the metal purchased a conservative position in Teck Resources (TECK) earlier this month. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. When the company reports fourth-quarter earnings on February 23, analysts expect revenue growth of 81% and per-share earnings growth of 415%. Further, high double-digit top line and triple-digit bottom line growth are forecast for Q1 and Q2 2022. I suggest raising the stop-loss to slightly under 32 on a closing basis for this trade. HOLD

Executives Predict Strong Q2 for Steel
Steel prices are on the rise globally, as construction demand and inflation simultaneously exert upward pressure on the metal, with benchmark steel rebar prices up over 15% since December.

China Steel Corp., the nation’s largest steelmaker, said last week that it would raise steel prices by nearly 2.5% on average for shipments in March. The company plans to raise steel prices by between NT$500 and NT$800 per ton, following three consecutive months of cuts.

The firm also noted that its Chinese customers are accelerating inventory buildup in the face of improving domestic demand during the high season.

Vietnam-based Formosa Ha Tinh Steel Corp. has also raised prices for hot rolled steel and steel rods by $90 and $40 per ton, respectively, according to the Taipei News. As more nations open up their economies, construction and automotive demand for steel are on the upswing, contributing to the higher use rates and prices.

Elsewhere, Luxembourg-based ArcelorMittal SA has secured long-term supply agreements with automakers in Europe. Prices are said to have risen by an average of 40 euros per ton for the company’s hot rolled steel and cold rolled steel plates, according to a statement by China Steel.

Steel executives around the world are predicting that March will be a turning point for steel use, with the second quarter of this year expected to see a sustained upward trend in steel prices.

Contributing to recent steel price strength is the government-mandated production cuts for steel producers in China during the winter Olympic Games being hosted in Beijing. Additionally, input costs for steel are rising as nickel is up 8%, iron ore has risen by 18% and metallurgical coal costs have soared nearly 50% since the start of this year.

What to Do Now
I’m moving Gerdau SA (GGB) to a sell after its recent underperformance (down 7% from our initial entry point). During its recent pullback, the stock edged under its 50-day moving average, triggering the sell. SELL

As previously discussed, prices for steel making coal are on the rise, which is partly attributable to the improved outlook for steel production and consumption globally. A beneficiary of higher coal prices is Natural Resource Partners (NRP), which is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including coal and other natural resources (mainly gas and timber). Approximately 65% of the firm’s coal royalty revenues and around 45% of coal royalty sales volumes were derived from metallurgical coal in the latest quarter, making the stock a good proxy for steel demand. In the third quarter, the company reported revenues of $57 million that were 90% higher from a year ago. Per-share earnings of $1.10, meanwhile, beat consensus expectations by 28 cents. Management said it sees steel demand “remaining strong” going forward, as global economic recovery is “more than offsetting” Covid-related challenges. The company also just declared a 45-cent per share quarterly dividend last week (4.8% yield). Q4 earnings are expected on May 11. Participants recently purchased a conservative position in NRP using a level slightly under 31 as the initial stop-loss on a closing basis. After the recent 10% rally, I recommended selling a half and raising the stop on the remaining position. I now suggest raising it further to slightly under 34.50 (closing basis). HOLD A HALF

Aluminum Rockets to Record Highs
Aluminum supplies remain tight in mid-February, helped by recent geopolitical worries and plant closures in China and Europe due to rising energy costs.

As of February 17, aluminum reached an all-time record price of $3,302 as end users have made a rush on LME-approved warehouse stocks. Stocks of the metal are currently half of what they were a year ago, according to Trading Economics.

aluminum_02-22-22

Aluminum prices are up 18% in the year to date already, thanks to strong industrial demand, but also due to tensions between the U.S. and Russia over Ukraine. According to the Wall Street Journal, natural gas prices in Europe are nearly five times as high as they were a year ago due to cold weather and a drop in the flow of Russian gas. “Energy can account for as much as half the cost of making aluminum,” said WSJ, “which is why traders call the commodity congealed electricity.”

Traders are also concerned that smelter closures in Europe and China will restrict already tight supplies, exacerbating the effects of supply-chain bottlenecks, a global semiconductor shortage and inflation.

Top producer Alcoa plans to shut its San Ciprian, Spain aluminum plant, with annual capacity of 228,000 tons. The plant is expected to be offline until 2024, mainly because of soaring energy costs in Europe. Norsk Hydro, meanwhile, plans to reduce output by 60% at one of its plants in Slovak due to a surge in electricity prices.

Meanwhile, from a supply perspective, stockpiles of aluminum in LME warehouses have dropped to less than 855,525 tons. This represents one of the lowest levels in 15 years, according to Westmetall market data.

Consequently, aluminum prices are expected to remain buoyant for most of 2022 as a tight global supply condition (the metal is expected to post a 2.2 million-ton deficit this year) is likely to continue.

What to Do Now
Earlier this month we bought a new trading position in Alcoa (AA) based on its technical and fundamental strength. Alcoa easily beat expectations in Q4 in reporting a 40% increase in sales and earnings per share of $2.50 (a 59-cent beat). The company generated revenue of $12.2 billion for the full year, up 31% from a year ago and the highest since 2018, while recording its highest ever annual net income and per-share earnings of $2.26. Going forward, the company sees higher aluminum prices as a major tailwind and plans to continue its strategy of reducing debt and pension obligations while increasing shareholder returns, recently initiating a new $500 million share repurchase program. Wall Street, meanwhile, sees revenue growth of 14% in Q1 and per-share earnings growth of around 200%. Earlier this month, I recommended that we book a quarter profit in Alcoa after the stock’s 10% rally. I also suggest raising stop-loss on the remaining position to slightly under 67 on a closing basis. HOLD

Nickel Rallies Back to Record High
After a recent 6% pullback from last month’s highest price in 10 years, nickel prices have since rebounded to the old high of $24,250 a ton.

Traders have described nickel demand as “robust” from the stainless steel and battery industries. Meanwhile, inventories continue to dwindle and are approaching five-year lows (below), while consistently rising energy costs have forced smelters to reduce output, further pressuring an already tight market condition.

inventories_02-22-22

Not all the news for nickel is sanguine, however. The economy of top consumer China (at 59% of global consumption) is slowing down, and the slowdown is rippling throughout the global economy, according to the Wall Street Journal.

China’s economy is expected to grow 4.8% in 2022 and 5.2% next year, according to the International Monetary Fund. This compares to annual growth of around 8% on average between 2014 and 2019, and below the nation’s potential annual growth rate of between 5.1% and 5.7% in the eyes of the People’s Bank of China.

WSJ noted that China’s slowdown could hurt commodity producers “for years to come,” while the Mining Journal observed that the slowdown could negatively impact nickel demand in the years ahead.

That said, the short-term outlook remains decidedly more optimistic for the nickel bulls. According to Shanghai Metals Market (SMM), LME nickel inventory has declined consistently all year, a trend that’s expected to continue for a few more weeks.

By June, however, SMM forecasts “significant” increases in nickel stocks as output is expected to gradually increase starting in March.

“Given the severe shortages of raw materials…any further improvement of nickel sulfate profit will be limited because nickel salt plants will resume their production after the profits recover to a certain level, which will intensify raw material shortfalls and boost raw material prices,” said SMM.

What to Do Now
Vale S.A. (VALE) is one of the world’s largest iron ore and nickel miners, as well as a diversified producer of other industrial and precious metals. Earlier this year, the company garnered attention when management announced an ambitious plan to reach 400 million tons of iron ore production by 2022, which, if realized, would be a 33% increase from 2020’s total production. More recently, though, Vale has shifted its focus on so-called “green” metals in an effort to diversify and generate higher shareholder returns. Vale recently guided for copper production to increase to a midpoint of around 345,000 tons per year, led by the firm’s Salobo 3 expansion copper project, while nickel production is expected to reach around 185,000 tons per year. Additionally, Vale’s outlook received a boost from the recently passed $1 trillion infrastructure spending bill, which would dramatically expand fiscal spending for roads, water pipes, EV charging stations and other infrastructure, in turn necessitating higher industrial metal production volumes. Analysts, meanwhile, expect Vale’s revenue for full-year 2021 to increase 34% while per-share earnings improve 85%. Traders did some nibbling around 14 in December, using a level slightly under 12 as the initial stop-loss on a closing basis. After the recent 14% rally, I suggested taking 50% profits. Earlier this month, I recommended raising the stop-loss to slightly under 16 on a closing basis (maintain this stop for now). Vale has given us 30% profit since December, but the stock is now starting to run up into what could prove to be strong overhead supply/resistance beginning at 18 and extending to 22. Moreover, the nickel market (which Vale partly represents) is admittedly becoming a bit overheated and could therefore exert a negative spillover impact on Vale and other nickel-related stocks. HOLD A HALF

Tin Marches Higher
Tin prices have increased 14% since the start of 2022 and were last seen around $43,700 per ton after reaching a fresh record high this month.

Tin inventories at LME warehouses were recently 2,360 tons, which is above last November’s record low of 887 tons but well under the 2020 average of 5,000 tons. Consequently, the tin story continues to be one driven by tight inventories and supply bottlenecks.

While solder accounts for almost half of global tin use, the metal is seeing a growing number of applications in the electrical vehicle (EV) and electronics spaces. Tin has been called “the glue” of the Internet of Things (IoT) due to its use as a solder in electronics manufacturing and packaging. Yet tin is being increasingly used in lithium-ion batteries that power EVs.

The International Tin Association estimates that 60,000 tons of tin demand is attributable to the EV industry alone. Tin producer Alphamin Resources said that at an annual growth rate of between 2% to 3%, an additional 9,000 per ton increase in tin demand will result.

“We could see the tin price higher over the next two to four years,” Alphamin’s CEO Martiz Smith told the Financial Mail.

What to Do Now
I recently placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy after the improvement in the tin price following a brief stumble in December. Keep in mind this is an exchange-traded note (ETN), not a traditional ETF, which is an unsecured debt note that trades more like a bond than a stock. Earlier last month, I recommended buying a conservative position in this tin-tracking vehicle. I also recently recommended taking a 50% profit in this position after January’s big rally. I now suggest raising the stop-loss on the remaining position to slightly under 127 on a closing basis. HOLD A HALF

Current Portfolio

StockPrice
Bought
Date
Bought
Price
2/22/22
ProfitRating
Aberdeen Palladium ETF (PALL)2132/8/222214%Sell
Alcoa (AA)642/8/227618%Hold
Gerdau SA (GGB)5.402/8/225.05-6%Sell
Gold Fields Ltd. (GFI)132/17/2212.961%Buy a Half
Invesco Commodity Tracker (DBC)222/1/22245%Hold
iPath Tin Total Return ETN (JJT)1201/11/2213411%Hold a Half
Natural Resource Partners (NRP)351/11/22377%Hold a Half
Sprott Platinum & Palladium (SPPP)New BuyBuy a Half
Teck Resources (TECK)332/8/22367%Hold
Vale S.A. (VALE)1412/14/211727%Hold a Half

Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.


The next Sector Xpress Gold & Metals Advisor issue will be published on March 8, 2022.