November 9, 2021

Gold Shows Signs of Life
Gold prices perked up late last week in the wake of some bullish interest rate developments. While silver and other white metals didn’t confirm the strength, there are reasons for believing that the safety-related move into gold will persist. Lithium, meanwhile, remains the undisputed leader in the broad metals sector as electric vehicle (EV) battery demand continues to accelerate. Rising EV sales from some major auto companies have only served to fuel the lithium bull market.

Feature Story: Gold Outlook Clears Up

Last week’s FOMC meeting provided some much-needed clarity to what had been an exceedingly murky environment for gold.

The Fed’s announcement that it would begin paring back the scale of its asset purchases in the weeks ahead was greeted stoically by stock investors, who didn’t seem to mind the Fed’s hawkish stance. But it was gold’s reaction to the news (over a three-day period) that raised some eyebrows.

According to the FOMC’s official statement, the “substantial further progress” the U.S. economy has made since last December convinced the central bank to shrink its balance sheet by reducing the pace of its Treasury and mortgage-backed security purchases by $15 billion per month, starting later this month and continuing into 2022.

Additionally, the Fed plans to end its quantitative easing program by the middle of next year. The FOMC further stated it may decide to change the pace of the asset purchase reduction as needed, depending on future economic circumstances.

However, the Fed kept its benchmark interest rate unchanged near zero, and Fed Chair Powell indicated that “officials can be patient on raising interest rates but won’t flinch from action if warranted by inflation.”

This particular decision is what gold investors were evidently waiting to hear, and it definitely took some of the sting out of the latest tapering decision. The fact that rates will likely remain low for months to come is a huge relief for equity investors, and more particularly, for gold investors.

It’s true that gold initially had a bearish reaction to the Fed’s announcement, with the December futures contract price dropping almost 2% after the FOMC meeting. But by Thursday, gold found a supporting bid and was up strongly on Friday, closing with a solid 3.5% gain from its intraweek low.

Also boosting gold’s demand profile was a sharp 5% decline in the 10-year Treasury Yield Index (TNX). This, more than any single factor, contributed to gold’s upside move late last week and signaled that the bond market may be having reservations about the economic growth outlook (which of course would be music to gold investors’ ears).

As an aside, it’s also worth noting that the U.S. dollar index reacted immediately to the Fed’s decision last Wednesday in uncharacteristic fashion—by weakening instead of strengthening. Indeed, the dollar’s dip to slightly under the 25-day moving average suggested that participants may still be concerned that inflation is more of a problem than the Fed anticipates.

As for gold, the metal remains stuck in the lateral trading range that was established earlier this year (thus, the dominant intermediate-term trend remains neutral). But the short-term outlook has brightened after last week’s impressive showing. It’s hard to see it on the 1-year chart, below, but gold has established a series of rising peaks and bottoms since late September—a positive step in the right direction.

More importantly, if gold can push decisively above the $1,840 an ounce level (the nearest benchmark chart “resistance” level), then a bullish breakout of intermediate-term significance will have been confirmed. And if this happens, it’s more likely than not that some potentially strong short-covering activity will take place—especially given the tendency for short interest to pile up near technically significant round-number levels.

As always, upside follow-through is of paramount importance in the coming days. Any loss of gold’s recent forward momentum would be a big setback for the buyers, so it’s imperative for the bulls to make their case by pushing ahead this week.

What to Do Now
With our favorite gold-tracking ETF, the GraniteShares Gold Trust (BAR), showing signs of life last month, I recommended doing some nibbling in the event gold prices surge ahead in the coming weeks on mounting inflation fears. To that end, participants purchased a conservative position in BAR on October 13 using a level slightly under 17.35 as the initial stop-loss (intraday basis). Let’s stand pat for now. HOLD

New Recommendations & Current Portfolio

White Metals Still Sluggish
It would be nice to be able to say that gold’s latest rally has a “silver lining” to it, but alas, such is not the case … at least not yet.

Silver—along with the other major white metals, platinum and palladium—didn’t confirm gold’s upside move last week. Instead, silver managed to make only a portion of the gains that gold made and wasn’t able to close above its nearest peak from October 25, at the $24.60 an ounce level. Platinum and palladium, meanwhile, barely budged higher at all.

To silver’s credit, it did manage to close above the psychologically significant 50-day moving average. But in order to fully confirm gold’s latest strength, silver should be making a series of higher highs and lows. Moreover, it should ideally be outperforming, or at least keeping pace with, gold.

So how should we interpret gold’s strong response to plunging Treasury yields while silver didn’t show the same enthusiasm? I would offer that silver’s relative weakness is the result of investors being less enthusiastic about the near-term inflation outlook, especially as the dollar index is still close to its high for the year.

By the same token, gold’s bullish response to lower rates was likely a move to safety by traders worried that lower yields reflect a weaker growth outlook. If gold’s rally is, in fact, safety-related then it won’t necessarily jeopardize the yellow metal’s chances of going even higher. Indeed, safe-haven demand can be sustainable by itself without participation from silver (at least in the short term).

For gold’s intermediate-term (3-6 month) outlook to be bullish, though, silver needs to confirm the strength by moving higher along with gold.

Meanwhile, platinum and palladium strength, while not as essential as silver strength, would be an added bonus. Shown here is the recent performance of the front-month platinum futures contract. And while platinum (a leading indicator for gold) is also above its key 50-day moving average, like silver, it wasn’t able to close the latest week above its nearest price peak. Hopefully we’ll see some increasing strength in platinum in the coming weeks, which would definitely increase the likelihood of an intermediate-term gold price breakout.

Returning to silver, our favorite silver tracker—the iShares Silver Trust (SLV)—is making progress in terms of establishing an intermediate-term bottom. But I would like to see some additional follow-through strength before making any new trading commitments to silver.

What to Do Now
I’m not currently recommending any new position in the iShares Silver Trust (SLV), our preferred silver-tracking vehicle. Although silver did close decisively above the 50-day moving average (which was needed to confirm a reversal of the intermediate-term downward trend in SLV), I’m going to play it conservative for now and stand pat with our gold ETF trading position. As previously noted, I’d like to see some additional firming up of the silver price before feeling comfortable enough to jump in again with both feet. WAIT

Copper Stuck in Limbo (Waiting on China?)
Over the past decade, there has been a surprisingly close correlation between the price of copper and the stock price average of China’s large-cap stocks.

The copper-China stock correlation can be seen by looking at a 10-year graph of the continuous contract copper price versus the iShares China Large-Cap ETF (FXI), which is my favorite tracking vehicle for China’s stock market.

Except for the brief disconnect in 2015, when a mini-bubble was underway in China’s equity market while copper prices were plunging, both assets have generally trended in the same direction. The question of whether copper leads the FXI, or vice-versa, is debatable; indeed, there have been instances when one or the other was in a leadership position. But the positive correlation over time is undeniable.

The reason for the close connection between China’s stock market and the copper price is obvious: the red metal is a well-known barometer of China’s industrial economy, and as such reflects the resulting business outlook as it’s priced into the equity market.

With that in mind, take a look at the 1-year chart which compares copper (black line) and the FXI (yellow line). As you can see, copper has been mainly in a position of strength lately while China’s large-cap stocks have been weak.

This begs the question as to whether China’s recent stock market weakness is a precursor to lower copper prices? Or does copper’s strength mean that China’s equity outlook (along with its economy) will improve in the coming months? These questions cannot be decisively answered yet, so we must instead turn to copper’s near-term fundamental picture for further insights.

Unfortunately, the recent fundamentals don’t provide much clarity, either. On the one hand, China’s weakening growth outlook is putting some downward pressure on copper prices. The country’s manufacturing sector unexpectedly slowed in October (for the second consecutive month), while lingering risks related to China’s property market sector also weigh on copper demand.

The copper outlook isn’t all bad, however, as inventories of the metal are still near a multi-decade low. The mix of good news/bad news perhaps explains why copper prices are near the middle of a 5-month trading range. In other words, there’s apparently a fairly even balance between buyers and sellers in the market right now with neither side having a decisive advantage. This means we’ll likely need an improvement in the demand picture before copper turns higher again on a sustained basis.

Copper mining and refining stocks, meanwhile, are in much the same condition as the copper price: sluggish, and in some cases, directionless. This is certainly true of our position in Taseko Mines (TGB) right now. To a lesser extent, Teck Resources (TECK) has weakened but is still in a stronger position than most copper stocks.

What to Do Now
We recently added Taseko Mines (TGB) after the stock broke above the 2 level. Canada-based Taseko is known mainly for being a mid-tier copper miner that operates the Gibraltar Mine, Canada’s second largest open-pit copper mine. Taseko produces more than just copper though, and the Gibraltar mine boasts proven reserves of 53 million pounds of molybdenum. Located in south-central British Columbia, Gibraltar has an estimated 18-year mine life and is located in a mining-friendly, low-risk jurisdiction. The company reported third-quarter results on November 3, which featured excellent production increases for both copper and molybdenum at the Gibraltar mine. Management said Gibraltar produced 35 million pounds of copper and 571,000 pounds of molybdenum in Q3, up 29% and 42%, respectively, on a sequential basis. Copper recoveries were 84.2% and copper head grades were 0.28%, in line with management expectations. Management added that Taseko is “well positioned for the year ahead as mining operations are smoothly transitioning into the Gibraltar pit, where grade is meeting expectations and the mills are efficiently processing the new ore.” Revenue of C$133 million came in 51% higher from a year ago during Q3, while per-share earnings of 10 cents topped expectations by 4 cents. After the recent 12% rally in TGB, I recommended taking some profit in TGB and raising the stop-loss to slightly under 2 (the original entry point) on an intraday basis. I suggest maintaining this stop for now. HOLD

Teck Resources (TECK) is one of the world’s largest copper producers and is also the second-largest seaborne exporter of coking coal, with four operations in Western Canada and significant high-quality steelmaking coal reserves. Going forward, Teck plans to double its copper production in the next two years, seeing demand for the metal dramatically increasing from the white-hot electric vehicle industry. A major Wall Street institution agrees, estimating Teck’s copper production will more than double from its “transformational” QB2 project (one of the world’s largest underdeveloped copper resources) in top producer Chile. In Q3, Teck handily beat analysts’ expectations for both earnings and revenue, driven by higher prices for metallurgical coal, with average realized coal prices more than doubling from a year ago. Copper prices jumped 43% and production for the red metal rose over 4%. Revenue of nearly C$4 billion was 73% higher from the year-ago quarter, while per-share earnings of $1.52 beat the consensus by 28%. Investors did some nibbling in the stock last month using a suggested initial stop-loss slightly under 24. Last month, I suggested raising the stop to slightly under 26 on a closing basis after the recent rally (maintain that stop for now). HOLD

We were stopped out of our trading position in the ADR for Glencore PLC (GLNCY) on November 2 when the 9.70 level was violated on a closing basis. SOLD

Steel Prices Await Resolution in China
China remains in the driver’s seat for steel, both on the supply and the demand front.

Steel rebar prices are near a six-month low and more than 20% below the all-time high from May. The industrial metal has faced near-term headwinds from lower raw material prices (including iron ore) and declining demand from China.

Meanwhile, China’s real estate sector has come into increasing focus lately as construction, which accounts for around 25% of domestic steel demand, remains under pressure. Home sales on the mainland have lately declined, while Beijing has been restricting borrowing.

Even as investors continue to worry about China’s Evergrande woes, another real estate crisis is brewing. CNN reports that shares of Kaisa Group, a Shenzhen-based developer, along with its subsidiaries, were suspended from trading in Hong Kong last week. Writes CNN’s Michelle Toh, the company has admitted to having “liquidity issues” and “admitted to missing a payment related to its wealth management products.”

CNN further reports that several other Chinese property developers have revealed similar liquidity issues and have asked creditors for extensions to allow them repay debts while warning of potential defaults. Needless to say, this is weighing on steel prices as reflected in the chart below.

Automobile manufacturing, meanwhile, has dropped as the global semiconductor shortage puts a crimp in steel demand. And on the industrial front, demand for steel in China has also been negatively impacted by the nation’s continued rationing of electricity.

Moreover, according to Mystel, weekly steel consumption in top consumer China dropped 2.3% last week from the prior week. It’s also not helping that iron ore prices are down 39% year to date, based on a contract that tracks this feedstock metal.

A final consideration is that supply issues are also weighing on the steel price outlook, specifically, an anticipated stainless-steel output increase. Stainless output is expected to climb this month from October levels thanks to relaxed power curbs in select producing regions in China.

What to Do Now
Alliance Resource Partners (ARLP) is a metallurgical coal mining complex operator with approximately 1.7 billion tons of coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia, making it the second-largest coal producer in the eastern U.S. Alliance produces a diverse range of metallurgical coal with varying sulfur and heat contents, enabling the company to satisfy the broad range of specifications required by steelmaking and thermal customers. The company also generates royalty income from mineral interests in premier oil and gas producing regions in the U.S., primarily the Anadarko, Permian, Williston and Appalachian basins. Last month, the company released third-quarter results which saw revenue increase 17% while earnings more than doubled to 44 cents per share, beating estimates by 8 cents. Coal volumes rose 10%, and management pointed to “extremely strong” U.S. coal demand. (On a related note, Bloomberg recently reported that U.S. coal stockpiles at utilities fell to their lowest level since 1997.) Soaring natural gas prices have also helped boost coal’s demand profile as an alternate fuel source. I recommend using a level slightly under 10.50 (closing basis) as the initial stop-loss for this recently initiated trading position. BUY A HALF

Ryerson Holding (RYI) is a value-added distributor and processor of industrial metals, including stainless steel, aluminum, carbon and alloys. Most of its customers operate in the metals fabrication with exposure to electric vehicles, e-commerce logistics, automation and other industries. Aside from being an indirect play on the steel industry, Ryerson is also an infrastructure spending play. The company posted revenue of $1.6 billion in Q3, a 90% increase compared to the comparable 2020 quarter and up 14% sequentially. Per-share earnings of $3.25, meanwhile, beat the consensus by $1.50. Also in the third quarter, Ryerson achieved a record gross margin of 23% and announced a quarterly cash dividend increase to 9 cents per share. Investors purchased a conservative position in RYI on November 2, using a level slightly under 23 as the initial stop-loss on a closing basis. BUY A HALF

Tin Stays Strong Near Record High
Per recent reports, we have a new buy signal for a mining company that will provide us with some exposure to tin after our stop-loss in the tin ETN was recently triggered. While the tin price itself has been subject to some volatility lately, demand for the metal remains strong in the face of tightening supplies (and in spite of steel market weakness).

The London Metal Exchange tin price is up 82% since January, according to a benchmark tracker for this commodity, and is currently just 1.5% below an all-time record high.

This year’s astonishing tin price increases have been driven by high demand (including from the copper market), and supply that’s been unable to catch up to it. This is in part due to a shortage from a major smelter in Malaysia, which was unable to fulfil contracts due to Covid-related lockdowns.

With tin remaining in a position of relative strength versus other key industrial metals, we recently added Alphamin Resources (AFMJF) to the portfolio.

What to Do Now
With tin remaining in a position of strength, I recently placed Alphamin Resources (AFMJF) on a buy. Mauritius-based Alphamin explores and develops mineral properties and is a low-cost producer of tin concentrate from its high-grade deposit, Mpama North, part of the Bisie Tin Project in the Democratic Republic of Congo. (Mpama North is the world’s highest-grade tin resource—about four times higher than most other operating tin mines in the world—allowing Alphamin to produce 3% of tin produced globally.) Alphamin also mines and sells tin from its North Kivu mine, producing nearly 10,000 tons of tin annually. While Alphamin is recognized as a promising tin producer, it flies largely under the radar among mining stock analysts right now. Total revenues for 2021 are projected to be around $310 million, up 66% from a year ago. Participants purchased conservative position in AFMJF on October 7 using a level slightly under 58 cents as the initial stop-loss. I suggested taking a bit of profit last week after the stock’s 12% rally and raising the stop to slightly under 65 cents. I now suggest further raising the stop to slightly under 70 cents (around the 25-day line). HOLD

EV Battery Demand Driving Lithium Price Boom
Lithium is figuring prominently on Wall Street, as publicly listed lithium-related companies (miners, EV car makers and the like) outperform analysts’ expectations and soar on widespread investor optimism for the battery metal.

Just last week, Barron’s featured a cover story (“Powering Up”) discussing the race to improve electric-vehicle batteries, with lithium figuring prominently in the story. According to the story, new technologies that use pure lithium anodes plus electrolytes “will solve the manufacturing challenge while delivering roughly 75% better energy density than current [EV] batteries.”

According to the latest EV news, meanwhile, worldwide electric car sales rose 98% in September (the latest date for which stats are available), reaching a record 10% share of all autos sold. In top consumer China, EV sales were up 171% for the month, reaching a 20% share, while sales in Europe rose 42%, reaching a 23% share. In all three categories, the share of the EV market rose on both a month-over-month, as well as a year-over-year basis.

Also last week, BMW Group announced that its year-to-date EV sales doubled, growing by 121% in the first nine months of 2021 and reaching almost 60,000 units. BMW Group also sold 231,575 all-electric and plug-in hybrid vehicles between January and September, up 99%.

BMW management was sanguine and said the results “confirms our strategic course” for its EV expansion plans going forward.

Elsewhere, Tesla’s operating cash flow was $1.3 billion in the third quarter. The company also reported record net income while also reaching an operating margin of around 15%. As an expression of Tesla’s strong anticipated growth, the company just signed a contract with top producer Ganfeng Lithium Co. to supply it with battery-grade lithium products for the next three years.

Year to date, lithium prices are over 400% as EV battery demand has persistently increased while supply worries linger. The governments of several major countries, led by the U.S., are making huge bets on the future of the lithium battery industry, helping to maintain the current lofty market environment.

What to Do Now
Livent Corp. (LTHM) is the largest U.S. lithium-only miner, providing a range of lithium-based products and serving the EV, chemical, aerospace and pharmaceutical industries. Revenue and earnings projections for Livent are strongly optimistic for the next several years, with analysts expecting top-line growth of 34% this year and around 20% next year, while earnings are projected to grow at an even faster pace. For Q3, Livent reported estimate-beating revenue of $104 million, an increase of 43% from a year ago. Management also increased full-year 2021 guidance ranges for both revenue (from a previous $380 million midpoint estimate to a $400 million midpoint estimate) and EBITDA (from $62 million to $70 million). The company also provided an update on its near-term capacity expansions, with the 5,000 metric ton hydroxide addition in Bessemer City and initial lithium carbonate expansion of 10,000 metric tons in Argentina expected to reach commercial production by the third quarter of 2022 and the first quarter of 2023, respectively. Additionally, its phase two carbonate expansion for an additional 10,000 metric tons is scheduled to be in commercial production by the end of 2023. Participants on October 13 bought a conservative position in LTHM using a level slightly under 22.25 as the initial stop-loss. After rallying 21% since then, I recommend taking some profit in LTHM and raising the stop-loss on the remaining position to slightly under 26 (our initial entry point). HOLD

Uranium Production in a “Broken-Down State”
Uranium future prices averaged $43 per pound last week, which is 12% below its $51 peak for this year (as well as a 9-year high).

The uranium price remains fairly buoyant despite a major miner, Cameco Corp. (CCJ), reporting a $72-million loss in the third quarter (compared with a loss of $61 million in the year-ago quarter). Cameco also said sales declined by $379 million in Q3.

On a more bullish note, top producer Kazatomprom launched a uranium fund similar to the Sprott Physical Uranium Trust (SRUUF), which has injected some enthusiasm into the market. The company will reportedly be “operating in an environment of tightening supply,” which gave a lift to the physical uranium market last week.

Also, Australia-based explorer Deep Yellow announced plans to develop a core Namibian uranium project. The company’s CEO, John Borshoff, recently said that while demand for uranium is assured, supply is not. Significantly, Borshoff made waves when he stated that the uranium mining sector is in a “broken-down state” with few companies set to enter new production.

“Not only is demand going to be higher than projected,” he said, “but everyone is overestimating how much new supply will come online.”

Echoing this sentiment, the World Nuclear Association forecasts uranium demand to reach 206 million pounds by 2030. It further projects supply will decline by 50% in that time due to a lack of new mines coming into production.

What to Do Now
One uranium player showing promise from an intermediate-term standpoint is Denison Mines (DNN), a Canada-based uranium exploration, development and production company. Denison’s flagship project is at Wheeler River, which has two high-grade uranium deposits, Phoenix and Gryphon. Phoenix is believed to possess the lowest production costs of any undeveloped uranium deposit, with all-in sustaining costs of $8.90 per pound (compared with current prices of around $32) and operating costs of just $3.33 per pound. All-in sustaining costs for Gryphon, meanwhile, are also a below-market $22.82 per pound, with a combined 109 million pounds of probable reserves and a 14-year mine life. Additionally, Denison recently agreed to acquire a 50% stake in the JCU Exploration Company from UEX Corp. JCU holds a portfolio of twelve uranium project joint venture interests in Canada, and the acquisition is expected to allow Denison to not only increase its indirect ownership of its flagship Wheeler River project, but also to expand its asset base to include additional important Canadian uranium development projects such as Millennium and Kiggavik. Denison is admittedly speculative, but with physical uranium supplies getting tighter thanks to the recent decision of the world’s largest uranium producer, Kazatomprom, to limit production in 2022 and 2023—and with the Sprott Physical Uranium Trust gobbling up uranium on the spot market—the stock looks to be in a good position to continue a turnaround that began last year. In Q3, Dennison reported total revenue of C$9.5 million (up 248% from a year ago) on earnings of 4 cents, beating the consensus by 5 cents. Investors purchased a conservative position in DNN last month with a level around 1.40 as the initial stop-loss. After the recent 15% rally, I also advised taking some profit and raising the stop on the remaining position to slightly under 1.50 on a closing basis. HOLD

Current Portfolio

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 November 23, 2021.