SX Gold & Metals Advisor | January 11, 2022

Industrial metals, led by tin and aluminum, are strengthening as we head into the New Year. Copper is hanging tough, while gold can’t seem to find any traction. Battery metals and rare earth miners are still in good shape overall, while silver is in a position to rally (assuming its short interest position continues improving). These are just some of the topics we’ll discuss in the latest report.

In the portfolio, we’re adding a new position in our favorite tin-tracking fund.

Feature Story: Gold – Plenty of Fear but Short Interest is Too Low

With plenty of things to worry about—from inflation, to the Fed, to the latest virus variant—gold should be in a fairly strong position right now. That the gold price remains directionless and can’t seem to rally for more than a short period before reversing is instead a testament to the rising Treasury yield environment, as well as the relentless strength of the equity market, both of which are stealing gold’s thunder.

After rising 3% in December, gold started off the New Year on a down note by surrendering 2% of its value and most of last month’s gain. The latest decline was widely blamed on the massive spike in the 10-year Treasury yield index, which rose almost 20% in just the first week of 2022. With the 10-year yield at around 1.8%, investors obviously have less incentive to hold non-yielding bullion in favor of higher-yielding bonds.

Higher government bond yields aren’t the only thing weighing on gold, however, as talk of the Federal Reserve’s intention to accelerate the pace of its asset purchase reduction (while moving forward the time table for raising its benchmark rate) has also served to scare away many investors from buying gold.

But as I’ve continually emphasized in this report, gold is much more than a rate-sensitive asset; it’s first and foremost a safe haven whose demand is mainly determined by the increased presence of fear in the financial market. And higher rates notwithstanding, there’s no shortage of things for investors to worry about on the horizon.

The latest data showed that U.S. nonfarm payrolls increased by 199,000 in December, which was well below what economists were expecting. Moreover, it’s widely anticipated that job increases will moderate in the coming months as Covid cases continue to spiral, potentially putting a damper on economic growth due to renewed virus-related restrictions.

On the geopolitical front, Russia’s military build-up in Ukraine is another major concern for investors. At a meeting of NATO members last Friday, ministers indicated that “any further aggression against Ukraine would have significant consequences and carry a heavy price for Russia” in the words of a NATO bulletin. The potential flashpoint in Russia has many investors on edge, which could in turn bode well for increased safety-related demand for gold.

Then there’s the demand side of the equation, which has improved markedly in recent weeks due to seasonal factors. Reuters credits improving retail appetite for physical bullion as the reason for dealers in India recently charging higher premiums for the metal. Additionally, the Lunar New Year (the most important holiday in the Chinese lunar calendar) has lifted the sales outlook for gold jewelry in Singapore and China and is another reason for rising premiums throughout Asia (see chart below).

So despite the prospect (and potential headwind) of rising interest rates, gold still has quite a few bullish factors in its favor from both a short-term and an intermediate-term perspective. But before gold is ready to kick off a sustainable rally (unlike its last few rally attempts), we should ideally see a sizable increase in gold short positions on the Comex.

On this score, short positions among money managers hit a one-year high in late September, which preceded the last notable rally for the yellow metal. Since then, however, gold shorts have fallen significantly and are near a one-year low as of early January. This decreases the chances of a major gold rally kicking off in the immediate future.

The bottom line is that while gold still has plenty of bullish catalysts, we might have to wait a few more weeks before investors’ fears have increased to the point where safe-haven gold demand is sufficiently revived and the next sustained gold rally begins.

What to Do Now
Given the recent improvement to gold’s technical (and sentiment) backdrop, I placed our preferred tracking vehicle back on a buy last week. Participants purchased a half position in the GraniteShares Gold Trust (BAR) using an initial stop-loss slightly under 17.75 on a closing basis. This was admittedly a tighter stop than I normally employ, but it’s based on the well-known commodity trader Amos Hostetter’s 60% rule (i.e. exit a commodity position when it retraces more than 60% of the prior up-move). On January 6, BAR closed at 17.74 which is a very close shave below my suggested stop. Nonetheless, I think we should respect the signal and exit the trading position (with a 1% loss). SOLD

We were stopped out of our conservative trading position in Harmony Gold Mining (HMY) last week after the stock violated our stop-loss slightly under 3.75 (the 50-day line) on a closing basis. Let’s hold off on initiating any new long position in the actively traded gold miners for now, until the technical picture shows improvement. SOLD

New Recommendations & Current Portfolio

Silver’s Intermediate-Term Outlook Brightens
Much like gold, silver prices have also had a hard time getting any traction in the last few months. The white metal has underperformed its brother metal, as jewelry demand was notably lacking in 2020 and the first half of 2021, due to postponed weddings and other events (related to Covid).

But according to consultancy group Metals Focus, silver demand in India (a top jewelry consumer) increased considerably in the second half of 2021, fueled partly by reduced Covid-related restrictions.

Metals Focus also noted that jewelers across India are aggressively restocking after heavy inventory reductions in the first half of 2021. “This,” says Metals Focus, “combined with improving economic momentum and consumer confidence, has led to an increase in the average retail ticket size, by as much as 15-20% compared to pre-pandemic activity.”

Aside from the improving retail demand picture, silver has another factor going for it, viz. a recent increase in short positions among asset managers. The latest Comex data shows that short positions for silver (unlike gold) have been edging higher in recent months. From a one-year low of 21,384 contracts in November, the current short position in silver is 40% higher.

Assuming the rising trend in Comex silver shorts continues, the ground will be prepared for a potentially worthwhile short-covering rally. And given how technically “oversold” silver has become of late, the next rally could be the one that kicks off the metal’s next intermediate-term bull market.

What to Do Now
I’m not currently recommending any new position in the iShares Silver Trust (SLV), our preferred silver-tracking vehicle. 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

Green Revolution Depends on Copper
The move toward “greener,” or renewable, energy that we’re hearing so much about these days is heading closer to becoming a reality. For metals investors, this is good news since copper will play an essential role in this transition.

The bullish longer-term case for copper was outlined in a recent Financial Times article by John Dizard, who pointed out that “you cannot get to the energy transition without copper and other essential metals.”

Dizard further explained that due to its higher conductivity, efficient heat transfer and ductility, copper “is critical for motors, transformers, wiring, and, in a warming world, air-conditioner piping.”

However, even as North America, Europe and Australia push ahead toward the green energy transition, lower copper production among these countries is a potential roadblock that will soon need to be addressed.

And with electric vehicles and green energy demand expected to account for around 72% of the total growth in global copper production, diminished supplies will become a major concern moving forward.

Meanwhile, LME warehouse supplies have been below normal for the last several months, with current stocks estimated at just over a week’s worth of consumption. This has prompted the normally conservative Goldman Sachs to forecast copper prices rising by some 50% above current levels in the next two years.

All told, the intermediate-to-longer-term fundamental outlook for the red metal looks bullish, which should support rising prices for the metal itself and for the stocks of the leading companies which produce it.

What to Do Now
Freeport-McMoRan Copper & Gold (FCX) is back on our radar after the stock’s latest show of relative strength. Not only is FCX manifesting strength versus the copper price, it has even begun to strengthen relative to the broad market S&P 500 Index. Based on the fundamental outlook for copper mentioned above, FCX could prove to be a top performer among the most actively traded copper producers. In its latest financial quarter, Freeport topped earnings estimates by missed revenue estimates, as copper prices rose while weaker gold prices weighed on sales. Net income soared to $1.4 million from $329 million in last year’s Q3, while revenue increased 58% to just over $6 billion. Consolidated copper sales were up 22% in the quarter, while gold sales jumped 72%. Averaged realized prices for copper were higher, while realized gold prices were lower from the year-ago quarter. Looking ahead, management said “the outlook for the copper market is extraordinarily positive,” and expects higher full-year sales for the metal. Traders can purchase a half position in FCX using a level slightly under 37 (closing basis) as the initial stop-loss. BUY A HALF

Steel Prices on the Rebound
After sinking in the final months of 2021, benchmark steel rebar prices are on the rise again after an increase in restocking demand and renewed production controls in Tangshan, a major industrial hub in China.

Reuters reported on January 4 that Tangshan issued an “orange alert” (the second highest in China’s three-tier pollution warning system) for heavy pollution and expected bad weather conditions. Because of the alert, manufacturers were ordered by state officials to cut their production until the alert is lifted.

The production cutback, coupled with overseas demand, has helped to keep steel rebar prices close to the recent high of around CNY 4,700 a ton. Reuters added that China is expected to keep the restrictions intact through at least February in order to ensure clean air conditions for its hosting of the 2022 Winter Olympic Games.

Meanwhile, iron ore prices for delivery at the Chinese port of Tianjin recently hit $122 a ton, nearly 50% above last year’s low price. The renewed rising trend in iron ore prices is a confirming sign of steel’s near-term strength.

What to Do Now
Grinrod Shipping Holdings (GRIN) is an international shipping company focused on minerals, ores, coal and other commodities. The company owns, charters and operates a fleet of dry bulk carriers and owns one medium range tanker. The stock’s strength in recent weeks is a reflection of improving global demand for industrial metals (it typically tracks key metals like steel). Most of Grinrod’s fleet trades on index-linked cargo contracts, short-term time charters or in the spot market, which allows the company to benefit from strong freight rates (as reflected by the recent highs in the Baltic Dry Index discussed earlier in this report). The firm also recently announced the closing of an acquisition of a 31% stake in its IVS Bulk joint venture, which should boost future revenues. Grindrod further announced that it repurchased around 92,000 common shares at an average price per share of $14.87. Revenue in the third quarter was 150% higher from a year ago, while per-share earnings of $2.28 beat the consensus by 19 cents. Traders recently purchased a half position in GRIN using a level slightly under 15.60 as the initial stop-loss (intraday basis). 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 said it remains committed to finding alternative revenue sources across its large portfolio of land, mineral and timber assets. Participants can purchase a conservative position in NRP using a level slightly under 31 as the initial stop-loss on a closing basis. BUY A HALF

Aluminum Continues Upward March
Among the major industrial metals, aluminum has been the hands-down winner in recent months. The white metal has risen some 20% in the last two months and is just 9% under its record high from last October.

According to leading flat-rolled aluminum producer and world’s largest recycler Novelis, aluminum demand related to automobile production is expected to remain under pressure while the semiconductor shortage persists, but auto-related demand is also expected to improve as the year progresses.

Meanwhile, Novelis says aluminum prices are being supported by “very robust” demand for beverage cans, consumer preference for sustainable packaging, and a package mix shift towards “infinitely recyclable” aluminum. The company further expects these demand trends to continue in the foreseeable future.

Novelis indicated that its aluminum shipments increased 5% in the third quarter of 2021 compared to the comparable year-ago period. It also reported a substantial earnings and revenue increase in Q3 compared to the prior year’s Q3.

On the inventory front, Trading Economics reports that aluminum supplies are falling with inventory reductions expected to widen as Europe’s power crisis persists (due to a cutback in smelter production). Additionally, LME warehouse stocks fell more than 50% between March and December 2020.

Also worth noting is that Indonesia has placed a ban on thermal coal exports, which has boosted coal prices. This is significant in that industry observers expect this will put downward pressure on aluminum production in top producers China and India (and potentially supporting higher prices).

What to Do Now
Among the most actively U.S.-traded aluminum stocks, Alcoa (AA) has not only outperformed the industry lately but is also in a relative strength position versus the broad equity market as reflected in the benchmark S&P 500 Index (as discussed in last week’s trade alert). From an earnings standpoint, Alcoa set a record for quarterly net income in Q3, prompting management to initiate a quarterly cash dividend (10 cents per common share). Revenue was up by a solid 32% from a year ago and well ahead of Wall Street’s estimates, driven by higher aluminum prices and higher premiums for value-added products. Liquidity isn’t an issue, either, as Alcoa had a cash balance of nearly $1.5 billion at quarter’s end, with no substantial debt maturities until 2027. Moreover, the company just launched a half-billion-dollar stock buyback plan. All these factors prompted a major institution to give Alcoa a “conviction buy” rating, the upgrade was also due to Alcoa’s efforts at decarbonizing its portfolio while supporting the “green transition.” Accordingly, I recommended on December 16 that participants purchase a conservative position in AA, using a level slightly under 45 as an initial protective stop. On December 22, I recommended taking half profits in AA after the latest 17% rally. I further suggest raising the stop-loss on the remaining position to slightly under 55 where the 25-day line comes into play. HOLD A HALF

Nickel Inventories Support Higher Prices
Nickel prices remain near an 8-year high entering the New Year after experiencing a 25% gain in 2021. The key battery metal remains under tight supply conditions, with demand expected to increase in the coming year from rising battery-electric vehicle (EV) use worldwide.

Nickel inventories at LME warehouses fell 58% from an April high of just over 110,000 tons to their lowest since December 2019 in December. Inventories in Shanghai warehouses, meanwhile, were at 5,500 tons in the latest week, hovering near a record low of 4,450 tons last seen in August.

I would also reiterate that the publicly traded stocks of some major global nickel producers are starting to look attractive from a fundamental perspective. Low P/E ratios, higher dividend yields and an improved earnings outlook (in part due to increased EV battery demand) are reasons for taking a closer look at the nickel stocks. One of my favorite ones is highlighted below.

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%. From a technical standpoint, VALE is coming off a 1-year low near 12 but appears to be bottoming out. Any improvement in the iron ore, copper and nickel prices from here should provide a boost to the stock. Traders who don’t mind the China-related volatility risk did some recent nibbling around current levels, using a level slightly under 12 as the initial stop-loss on a closing basis. After last week’s 10% rally, I suggest taking 50% profits and raising the stop to slightly under 13 (closing basis). SELL A HALF

Lithium Supply Remains Pressured
Lithium prices are at record highs entering the New Year after gaining nearly 500% in 2021. The key battery metal remains under supply-related pressures, exacerbated by mining restrictions in the U.S. and around the world.

Indeed, lithium carbonate prices continue to rise in the face of global supply shortfalls and huge clean-tech demand for the metal.

Boosting the lithium outlook is massive global demand for electric vehicles (EVs). EV sales are estimated to have risen by 160% during all of last year, while deliveries in China are expected to double in 2022, to over five million.

What’s more, Trading Economics reports that auto manufacturers have been forced to give preference to long-term contracts, as lithium miners face opposition from environmental groups—in turn keeping the supply situation tight.

As one example of this, Rio Tinto PLC (RIO) pledged over $2 billion to develop lithium mines in Serbia, but environmental protesters have stymied those plans for now.

What to Do Now
Sigma Lithium Resources (SGML) is a Canada-based, exploration-stage lithium developer with access to the largest hard rock lithium deposits in the Americas, located in its wholly owned Grota do Cirilo Project in Brazil. The company has been producing low carbon high purity lithium concentrate at an on-site demonstration pilot plant since 2018, with plans to reach near-term commercial stage production (initially in 2022) and eventually producing 220,000 tons annually of battery grade lithium concentrate. It’s admittedly a speculative play with sovereign and mining-related risks in Brazil. But with its substantial, high grade and low impurity resource, coupled with booming lithium carbonate and hydroxide prices, the risk appears justified. Accordingly, speculators who don’t mind the risk recently did some nibbling, and I recommended using a level slightly under 8.75 (intraday) as the initial stop-loss. After the latest 10% rally, I now recommend selling half this position and raising the stop-loss to slightly under 9.50 (intraday) near the 50-day line. SELL A HALF

Tin Retains Top Performer Spot
Through most of 2021, the top-performing industrial metal wasn’t steel, copper or aluminum, but the oft-overlooked tin.

The silvery, soft metal used to produce solder and to coat other metals rose by a very respectable 100% last year, recently hitting a record high of around $40,000 a ton. While most people tend to associate tin with pre-aluminum cans and old-school toy soldiers, the metal has a little-known (but rapidly growing) application in several “green” technologies.

Specifically, tin is increasingly used in photovoltaic solar panels, electric vehicles and other electronic applications related to alternative energy. For these reasons, the metal has become a hot commodity in recent years.

From a near-term standpoint, supply disruptions and low inventories continue to plague the tin market, with LME warehouse supplies (just 2,045 tons) well under the 2020 average of 5,000 tons.

Additionally, news outlets are reporting that attempts in Myanmar (the world’s number six tin producer) at stopping the spread of the coronavirus have resulted in widespread shipment delays, in turn cutting tin concentrate shipments to top producer China by roughly half. (China relied on Myanmar for more than 90% of its tin concentrate imports in 2020.)

Elsewhere, the world’s third-largest refined tin producer, Malaysia Smelting Group, which had temporarily suspended contract deliveries since last June based on a major virus outbreak, has lifted “force majeure” as of late December due to an improvement in its Covid situation. The extended production downturn, however, has put a strain on the global tin supply situation that will likely take months to completely recover from.

What to Do Now
I’m placing the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy after the recent strengthening 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. That said, I recommend only a small, conservative position in this tin-tracking vehicle. I also suggest using an initial stop-loss slightly under the 115 level (the current location of the 50-day moving average) on an intraday basis for this trading position. BUY A HALF

Neodymium Demand Remains Strong
Neodymium prices are up 68% for the year to date and up 150% from a year ago, driven by strong demand in the magnet and laser markets. Praseodymium prices, meanwhile, are up 185% from a year ago driven by demand from the magnet and colorant markets.

In a bid to increase its control over the production and pricing of rare earth metals, China plans to consolidate much of its rare earth production under a single vehicle.

According to Seeking Alpha, “By combining the rare earth divisions of Aluminum Corp of China (ACH), China Minmetals, and Ganzhou Rare Earth Group, the Government feels China can improve its competitive position, after seeing global market share fall from 86% in 2014% to 58% last year.”

Additionally, the White House recently announced a plan to protect supply chains, develop a domestic lithium battery industry and begin to mine substantial quantities of rare earths—measures that should support neodymium and praseodymium prices going forward.

What to Do Now
In early December I suggested selling half our stake in Lynas Corp. (LYSCF), a rare earth mining company based in Australia and boasting one of the highest-grade rare earth mines in the world (including neodymium and praseodymium (NdPr), lanthanum, cerium and other mixed heavy rare earths). Participants previously bought a conservative position in LYSCF using a level slightly under 5.25 as the initial stop-loss on a closing basis. But after rallying 15% from our initial entry point, it was time to take some profit based on the rules of our technical trading discipline. I also suggest raising the stop-loss on the remaining position in this stock to slightly under 7. HOLD A HALF

MP Materials (MP) operates the largest rare earth mineral mines in the Western Hemisphere, currently accounting for around 15% of total global supply, with a focus on Neodymium-Praseodymium (NdPr)—a crucial input used for making rare-earth magnets used in many of those devices. MP opened Wall Street’s eyes to the oft-overlooked industry in Q3, boasting estimate-beating revenue that soared 143% from a year ago and 36% sequentially, while net earnings nearly tripled, prompting at least two major institutions to recommend the company. Management also reported generating a “significant” amount of cash from operations, which will be used to advance its Stage II and Stage III plans to restore the full rare earth supply chain to the U.S. (Most of the rare earth concentrates MP produces are sold to China through an intermediary, but its plans will allow it to bypass the middleman and fully process and sell NdPr straight to end users.) MP also got a boost when it was revealed that automaker General Motors (GM) has contracted with the firm to supply magnets for building motors for more than a dozen GM models. Most recently, J.P. Morgan analyst Michael Glick raised his December 2022 price target for MP from $45 to $52 (up 16%) based on higher rare earth prices. MP Materials’ move into rare-earth magnets “could drive multiple expansion for the company,” he said in a December 10 research report. Traders recently purchased a conservative position in MP and also booked some profit after the recent 14% rally (per the rules of our trading discipline). I now recommend exiting the remainder of our trading position in MP due to the recent show of weakness. SELL

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 January 25, 2022.