March 8, 2022

The iconic phrase above was uttered by James Cagney in the movie White Heat just before his character blew up in a spectacular explosion. The metaphor is a timely one for the broad metals market as prices across the board are skyrocketing to heights not seen in years, or even decades!

But streaking metals prices can quickly reverse based on a dramatic shift in the prevailing geopolitical narrative. For that reason, I recommend tightening up stop-losses and proceeding with caution rather than getting carried away with excessive optimism.

In the portfolio, we just added a new position in a dual steel and aluminum play that looks set to pop.

Featured Story: Gold, Other Metals Having a Good War

Despite having every fundamental reason for a bull market, gold lagged the industrial metals last year as inflation pressures had little impact on bullion prices. Now that war is in full swing in Eastern Europe, however, gold finally has the broad safe-haven support it has lacked and is finally off to the races.

The yellow metal has risen $180 an ounce since its rally started in early February and is closing in on the psychologically significant $2,000 level, a benchmark that many institutional investors and hedge funds regard as key to determining the metal’s next intermediate-term swing. If gold breaks out decisively above $2,000 then an even bigger move to above the August 2020 all-time high is expected, followed by even higher highs (or so goes the popular narrative).

I’m not here to argue with this outlook, for a broad metals market driven by war-time inflation pressures can surprise even the most sanguine forecasts. I do think it’s important to remember, though, that gold—like all metals—is a cyclical commodity that can quickly cool off if the worry that’s currently driving it (namely war-related fear) diminishes. A cease-fire between Russia and Ukraine, even a temporary one, could force gold prices quickly lower in the near term.

For that reason, I recommend that participants with long positions in gold or any of the metals we follow use a rising stop-loss strategy to lock in profits in the event of a sudden reversal. While the run-ups we’ve seen in the leading base and precious metals have been incredible, many of them are reaching levels that suggest profit-taking pressures could come into play in the very near term.

Copper, for instance, has just hit an all-time high above $4.90 a pound on worries over supply disruptions due to the war, as well as record low inventories. Aluminum prices just broke another record, as well, due to Russia-related inventory concerns. Also, disruptions to steel exports due to the Russia/Ukraine conflict are prompting buyers to seek alternative suppliers since both nations account for around 14% of the global steel trade.

Meanwhile, palladium is near a record high at $3,000 an ounce after an eye-popping 25% rally last week on (what else?) supply shortages. Russia is an outsized player in this market, accounting for 40% of the metal’s global production which, incidentally, is always transported via air freight. This is significant since recent economic sanctions mean that Russian planes have been barred from entering other countries.

Finally, secondary metals like zinc (up 50% in the last year), cobalt (up 57%), nickel (up 85%) and tin (up 105%) are all at, or near, record levels and having a “very good war,” as they say, while the energy metal uranium (up 90%) is also benefiting from the overseas conflict.

Most of these metal prices have a stretched or vertical appearance, as shown by the following nickel price chart. This underscores the need for temperance in the face of unrestrained exuberance. And while there are many reasons to remain optimistic on the intermediate-term (3-9 month) outlook for industrial and precious metals (including gold), near-term caution is warranted given the extent of recent rallies.

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 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. After buying a conservative position in GFI on February 17, the stock has since rallied 21%. Per the rules of my trading discipline, I recommend taking 50% profit and raising the stop-loss on the remaining position to slightly under our initial entry price of 12.80 (closing basis). SELL A HALF

With inflation likely to persist at least through the first half of 2022, not only industrial metals but commodities in general should generally outperform. One way to play 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. After the 21% rally since our initial entry, I suggest taking 50% profit in this position while maintaining the stop at slightly under 24 (closing basis) on the remaining position. SELL A HALF

New Recommendations & Current Portfolio

Silver Rallies on Safe-Haven Demand
Along with gold, silver is getting a major supporting bid from the Russia/Ukraine conflict.

Not only are worries over a prolonged war between the two nations prompting safe-haven seekers to load up on gold’s sister metal, but investors are betting that the Federal Reserve will be forced to hold off on (or at least scale back) aggressive interest rate hikes.

With the yield factor being less of a threat to silver, the white metal has been freed from one of its biggest constraints of the last several months. Subsequently, silver has rallied 20% from its December 9 low of $21.67 an ounce to just over $26 as of this writing.

Even more impressive, however, has been the recent performance of the other white metals. As mentioned above, palladium is up 25% in just the last week on Russia-related supply concerns. The other Russia-dominated white metal, platinum, is up 23% from its December low and is staging what looks like a major turnaround from last year’s decline.

After peaking at $1,300 an ounce in February 2021, platinum is just $180 below that peak as of March 7, though it still has a way to climb before reaching its $2,163 all-time peak from 14 years ago. Russia, by the way, accounts for 16% of the world’s platinum supply, so the rally should have legs as long as the war continues.

On the bullion coin front, American Gold Eagle coin sales for the year to date came in at 271,000 ounces, according to the U.S. Mint. That’s 22% lower than the 346,000 ounces sold in the comparable period last year. However, this declining coin sales trend is expected to reverse as silver and gold prices skyrocket in the face of war-driven inflation concerns.

What to Do Now
Traders who want some exposure to the platinum group metals recently purchased 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. After the 15% rally in SPPP since our initial entry, I now suggest taking 50% profit and raising the stop-loss on the remaining position to slightly under our initial entry point of 17.20 (closing basis). SELL A HALF

Ultra-Tight Inventories Keep Copper Buoyant
The story in copper is very much the same as in the other key metals, only more extreme. For some weeks now, LME-warehouse inventories of the red metal have been lingering at, or near, record lows. At one point, industry members even said that copper inventories were at just 3-to-5 days’ supply!

The super tight supply situation drove last week’s spike in copper futures prices to a record high above $4.91 for the first time. Concerns over further potential supply disruptions surrounding the war in Eastern Europe are another reason for the surge in copper demand.

According to the latest data, copper stocks held by LME were their lowest level since 2005, at 68,825 tons. In February, meanwhile, supplies in the Shanghai Futures Exchange and Comex were under 200,000 tons, according to Trading Economies. An industry consultant quoted by Mining.com aptly summarized the situation when he said, “The market is in a panic mode in terms of supply.”

Additionally, top producer Chile posted its lowest copper output in 11 years this January, with production declining 15% on a month-over-month basis, and falling 8% from a year ago.

A final observation is that global copper smelting activity declined in February, partly because of the Lunar New Year holidays in China. Data from satellite surveillance of China’s copper plants suggested the top producer had diminished production last month, though activity is now said to be rebounding.

Copper demand, however, is dramatically increasing in developed countries, with electric vehicles and alternative energy (wind farms, solar panels and power grids) accounting for most of the consumption.

What to Do Now
In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), participants who wish to have some exposure to the metal purchased a conservative position in Teck Resources (TECK) on February 8. 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. In the fourth quarter, Teck reported revenue of $4.4 billion that was 78% higher from a year ago, while per-share earnings of $1.98 beat estimates by 6%, driven by higher prices for copper and steelmaking coal (a business Teck plans to transition away from). Teck also raised its annual base dividend to 50 cents per share (from 20 cents), and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit top line and triple-digit bottom line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons, (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I previously suggested booking 50% profit. I also recommend raising the stop-loss on the remainder of this trading position to slightly under 36 on a closing basis. HOLD A HALF

China Back in the Steel Industry Spotlight
Collectively, Russia and Ukraine account for around 14% of the global steel trade, which means that disruptions to steel exports due to their conflict are prompting buyers to seek alternative suppliers. This is just one reasons behind the 22% rally in steel prices since December.

As the Russia/Ukraine war drags on, buyers are sourcing more of their supplies from top producer China. In response to this increased demand, China is making plans to boost its iron ore output as well as its use of scrap steel in the production process. Last month, China’s Ministry of Industry and Information Technology said it would “significantly increase” its mines’ iron ore output in order to increase both the quantity and quality of its steel.

By 2025, China plans to collect over 300 million tons of steel scrap annually to supply its ferrous industry. A government-backed consultancy had previously estimated steel scrap supplies stood at around 260 million tons in 2020, as reported by Mining.com.

Steel’s story is more about just supply-chain challenges, however. Indeed, Steel’s strong recent performance has also been backed by persistent demand, with the construction, automotive and industrial sectors accounting for most of it. The good times are expected to last, with several major North American steel producers guiding for continued strength throughout 2022 and into next year as supply constraints coupled with increasing consumption pushing prices higher.

Prior to the outbreak of the war, China had seen reduced output of the metal due to environmental restrictions related to this year’s winter Olympics, as well as coal shortages and reduced demand from the nation’s beleaguered real estate sector. But lately China’s central bank has been lowering interest rates and increasing the money supply, and local governments have been cutting taxes and increasing infrastructure spending in order to stimulate the weakened economy.

Consequently, many economists expect domestic Chinese steel demand to increase along with its production of the metal this year in response to these stimulative measures.

What to Do Now
Reliance Steel & Aluminum (RS) is the largest metals service center operator in North America, providing metals processing, inventory management and delivery services for several industries, including construction, energy, electronics, automotive and aerospace. With metals demand and pricing buoyant in each of these key industries, Reliance finished 2021 on a high note, setting records in a number of key metrics despite supply-chain disruptions and labor market tightness. The company also returned over $500 million to shareholders through dividends and buybacks, with $713 million remaining on a $1 billion share repurchase authorization. Further out, management said it was optimistic about business conditions across its end markets and estimates a 6% increase in tons sold for Q1 compared to the year ago. Reliance also guided for Q1 per-share earnings to range between $7.05 and $7.15 (up 4% sequentially at the midpoint and in line with estimates). In view of the relative strength in this dual steel/aluminum company, traders can purchase a conservative long position in RS using a level slightly under 170 as the initial stop-loss. BUY A HALF

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 to slightly under 34.50. I now suggest raising the stop a bit higher to slightly under 35.35 (closing basis) where the 50-day line comes into play. HOLD A HALF

Sanctions Drive Aluminum to Record Highs
It should come as no surprise that the problems involving Russia are having a negative impact on the aluminum industry.

More precisely, prices are soaring on logistical fears as supplies from the world’s third-largest aluminum producer (around 6% of global supply) become restricted in light of economic sanctions placed on that country. Aluminum futures soared to a record high of $3,850 early in the second week of March and showed no signs of abating as product becomes harder to source for big-scale industrial buyers.

According to news reports, the world’s three biggest container lines, Switzerland’s MSC, Denmark’s Maersk and France’s CMA CGM, all suspended cargo shipments to and from Russia in response to Western sanctions on Moscow. This follows similar moves by Ocean Network Express of Singapore and Germany’s Hapag Lloyd.

Further on the supply side, the latest data showed that LME warehouse inventories were at around 810,000 tons as of early March, a 60% reduction from a year ago (see chart below). This supports a continued bullish intermediate-term outlook for the industrial metal.

Daniel Briesemann, an analyst at Commerzbank in Frankfurt, observed that the latest rally in aluminum prices is due to what he called “second round effects” of the sanctions against Russia. He predicted that supply and logistics issues would worsen in the coming weeks, forecasting a record aluminum futures price of $4,000 (just 4% above the latest price).

What to Do Now
On February 8, 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%. Last month, I recommended that we book a quarter profit in AA after the stock’s 10% rally. I now suggest selling another quarter in AA after the last week’s rally and raising the stop-loss on the remaining position to slightly under 75 on a closing basis. SELL A QUARTER

Nickel Outlook Improves on Russia/Ukraine War
Nickel prices continue to surge higher, easily surpassing a previous high from 2010 but still below its all-time peak of $49,260 a ton from 2007.

The recent strength can be attributed to Western sanctions against Russia over its invasion of Ukraine (Russia accounts for around 7% of global production), but also to technical market factors. According to Bloomberg:

“The latest [nickel price] spike comes as clients with short positions have been stopped out of the trades, a nickel trader involved in the transactions said. Clients such as industrial hedgers have been hit with large intraday margin calls as prices have surged [last] week on worries of supply disruptions from Russia, and they’re now being forced to close out their positions in an increasingly illiquid market.”

Along with prospects of severe supply reductions from the world’s third-largest nickel miner, strong demand from the stainless steel and battery industries gave credence to nickel’s bull case.

Moreover, diminishing nickel inventories continue to be a factor in the market, as LME warehouse supplies are down nearly 70% since last April, to 83,328 tons.

While Shanghai Metals Market (SMM) had earlier this year forecast “significant” increases in nickel stocks as output was expected to gradually increase starting in March, that prediction has been pushed back due to the Eastern European military conflict. Accordingly, nickel’s bull market looks sustainable, although prices are stretched and likely due a technical pullback soon.

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. In the fourth quarter, Vale’s revenue of $13.1 billion was dropped 11% from a year ago but beat the consensus forecast by 2%, while per-share earnings of $1.07 beat estimates by 20 cents. The company’s iron ore production fell 2.4% in Q4, while iron ore sales increased 0.4%. Vale also announced the distribution of dividends to shareholders of 3.7 reais per share (equal to around $3.5 billion). A major financial institution subsequently upgraded Vale shares based on rising iron ore prices. I recommend raising the stop-loss on our remaining long position in VALE to slightly under 17.50 on a closing basis. Vale has given us 43% profit since December, but the stock is now starting to run up into what could prove to be strong overhead supply/resistance extending to around 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 Retains Leadership Position
Tin prices have increased 25% since the start of the year and were last seen around $47,540 a ton after reaching a fresh record high on March 7.

In industry news, the International Tin Association (ITA) reported earlier this month that trade between China and Myanmar was disrupted after two new Covid cases were confirmed in Panghsang, Myanmar. (Due to China’s Zero Covid policy, even a single case of Covid is viewed as a risk and can result in factory shutdowns.)

ITA noted that tin production in the Man Maw area of Myanmar, one of the most significant areas in the world, passes through the city of Panghsang on its way to China. From Panghsang, trucks pass through the Chinese border town of Menglian before heading to Gejiu for smelting and refining.

Prior to the latest lockdown (which was scheduled to end on March 5), supply of tin concentrate had been slowly improving as backlogs cleared, according to the ITA. The temporary supply setback, however, likely added to the supply-related pressure pushing tin prices higher.

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.

However, it should be noted that according to Commitments of Traders data, commercial players are net short tin (although hedging activities related to commercial activity is still net long).

What to Do Now
I placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy on January 10 after the improvement in the tin price after 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 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 132 on a closing basis. HOLD A HALF

Uranium Exempt from Sanctions for Now
The U.S. nuclear power industry is lobbying the White House to allow uranium imports from Russia to continue in spite of the Russia/Ukraine war, according to Reuters. According to industry experts quoted by Reuters, “cheap supplies of the fuel seen as key to keeping American electricity prices low.”

Based on World Nuclear Association data, Russia, Kazakhstan and Uzbekistan collectively account for about half the uranium powering the United States’ nuclear plants, or approximately 23 million pounds. This uranium consequently is used to produce nearly 20% of the nation’s electricity.

Although several sanctions against some key commodities have already been imposed against Russia, those sanctions currently exempt uranium sales and related financial transactions.

The National Energy Institute (NEI), which includes major U.S. power providers Duke Energy and Exelon, is lobbying the White House to keep the exemption on uranium imports from Russia, Reuters said.

What to Do Now
Uranium and uranium miners have been in the doldrums since prices peaked last November, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is starting to attract new interest among investors while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—looks attractive after correcting almost 40% between November and January. Participants recently purchased a conservative position in URA, using an initial stop-loss slightly under the 20 level as the initial stop (closing basis). In view of heightened geopolitical uncertainties, I’m going to recommend raising the stop to slightly under 22 (closing basis). BUY A HALF

Current Portfolio

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 22, 2022.