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SX Gold & Metals Advisor
Profitable Investing in Mineral Resources

SX Gold & Metals Advisor | August 10, 2021

Industrial Metals Are Perking Up

While gold and silver are weighed down by the hawkish tone of the Federal Reserve—along with a rise in longer-dated Treasury yields—traders are increasingly turning their attention to the industrial metals sector.

Beginning with a big up-move in nickel prices in July, other key industrial metals are beginning to show signs of life after months of being dormant. Steel has perked up nicely in recent weeks, thanks to China-related supply pressures and rising global demand.

Meanwhile, copper is showing signs of returning to a position of strength after a two-month slump. And while the red metal will likely remain volatile in the near term, a series of (mostly positive) copper producer earnings reports suggest that the supply/demand balance remains favorable for the red metal from an intermediate-term (3-6 month) perspective.

Feature Story: Another Setback for Gold

The recovery effort in gold has admittedly been a bumpy ride, with bullion prices proceeding by fits and starts since bottoming in March. The latest setback in gold’s turnaround was disappointing to be sure, but not entirely shocking given the persistent strength of the U.S. dollar and the lack of confirming strength in gold’s sister metal, silver.

A strong U.S. jobs report was the culprit for gold’s sharp decline last Friday. The latest nonfarm payrolls report increased expectations that the Federal Reserve could raise its benchmark interest Fed funds rate sooner than expected, which quickly soured sentiment for the rate-sensitive precious metals.

Indeed, the latest sign that the U.S. economic recovery is gaining traction, despite continued Covid-related restrictions in some areas, has boosted risk appetite among investors. Naturally, this was bad news for gold since safety demand for the metal has correspondingly diminished in the face of brighter economic prospects. More tellingly, the biggest catalyst behind gold’s 3% decline last week was likely the sharp rally in U.S. Treasury bond yields.

The 10-year Treasury Yield Index (TNX) was up 11% from last week’s low in the wake of the strong job market numbers. TNX also managed to close above its key 25-day trend line on a weekly basis for the first time since May. This serves as a technical “heads-up” signal that bond market participants likely mean business, and this could be the start of an extended rally in bond yields.

Of course, rising yields are typically bad news for gold prices since the metal competes with bonds for yield-seeking investors. Non-yielding bullion is at a decided disadvantage when bond rates are rising, so it’s with some trepidation that I view the latest TNX rally.

Moreover, most of the gains in the latest U.S. jobs report showed that most of those gains came from the low-wage leisure and hospitality sectors. This doesn’t exactly suggest that inflation is a near-term concern among investors, thus further undermining gold’s appeal as an inflation hedge.

That said, it’s not my belief that gold’s turnaround since March was predicated on inflation returning in a big way. Rather, I view the March-June gold rally as the result of the market’s fear that Covid-related restrictions will eventually return in a big enough way to potentially dent the economic recovery. In other words, fear of economic weakness—and not fear of inflation—is the likely rally catalyst for gold.

We saw further evidence of that starting in late June when, after pulling back sharply earlier that month, gold prices began to march higher again in July as the return of the much-heralded Delta variant of the virus began making headlines. But while virus-related restrictions have made a return in some U.S. cities, the restrictions haven’t been widespread enough to make a serious dent in the economy’s recovery. Thus, gold’s safety appeal has been somewhat tarnished for now.

From a technical perspective, I mentioned last week that gold’s 50-day moving average around the $1,830 level was still a price obstacle. A decisive breakout above this widely watched (and psychologically significant) trend line would undoubtedly have paved the way for some additional short-covering. But as gold was unable to break out above this barrier (see chart below), the bears had an easier time raiding the market last week and having their way with prices.

Another problem that gold has faced in recent weeks has been the conspicuous non-confirmation from its “sister” silver. As previously noted, silver should always lead (or at least keep pace with) gold’s rallies to assure that gold’s strength is more than merely ephemeral. The reason behind this correlation is that silver, being a much cheaper option for precious metal traders, rallies suggest that there’s a considerable amount of participation among smaller retail traders, whose collective power to move bullion prices higher can’t be underestimated.

With silver showing considerable relative weakness versus gold recently, it’s not terribly surprising that gold fell as sharply as it did last week in the wake of the jobs report. As I put it in last week’s update, “The fact that silver has notably lagged the yellow metal lately is a sign that gold likely isn’t quite ready to launch a sustained uptrend.”

That said, where does this leave gold’s intermediate-term (3-6 month) outlook? I still view the intermediate outlook as favorable for higher gold prices, as gold’s all-important “fear factor” is still alive and well. As long as the Delta variant continues to command news headlines and inspire increasing strictures throughout the U.S. and around the world, there should be a supporting bid for gold as a safety hedge.

Moreover, “peak” GDP and (likely) peak corporate earnings, coupled with continued volatility in U.S. and global economic numbers, should combine to keep gold prices fairly buoyant in the face of short-term selling pressure from higher bond yields and the strengthening dollar.

Just where gold’s supporting “line in the sand” begins and ends is open to speculation, but I see it as likely being strong around the $1,680 to $1,700 area. A decisive penetration under $1,680 on a closing basis would indeed be disappointing and would cause me to reevaluate my bullish intermediate-term thesis.

With virus-related fears still in the air, however, it’s hard for me to see gold’s fear factor completely failing in this milieu. For now, a defensive posture is warranted, and we are back in a cash position in the gold segment of our trading portfolio after our stop-loss in the gold ETF was violated last week (see below). This week’s follow-through to last week’s gold weakness will provide us with a clearer idea of just how much near-term support gold has.

What to Do Now
Traders recently purchased a small position in the GraniteShares Gold Trust (BAR), which is a low-cost way to track price movements in the physical gold price. I previously suggested using a tight stop-loss for BAR since gold wasn’t completely in the clear yet (with regard to silver’s lack of confirmation). We ended up exiting the long position in BAR on August 6 after the 17.66 level was decisively violated on an intraday basis. No new trading positions in BAR are recommended at this time as we await a more favorable entry point. SOLD

We also exited our trading position in Barrick Gold (GOLD) last week after our stop-loss at the 20.50 level was violated in sympathy with the gold price tumble. I’ll have more to say about the gold mining stocks in the next update after I’ve had a chance to see this week’s follow-through action in the leading senior, mid-tier and junior mining stocks. SOLD

New Recommendations/ Updates: Steel is Starting to Firm Up

Silver Still Under Selling Pressure
For the better part of the last 10 weeks, silver just can’t seem to get out of its own way.

After peaking at around $29 on May 18, the white metal has been in steady decline and has fallen nearly 17% from its May peak price as of last Friday.

Silver has also been unable to close above its psychologically significant 50-day moving average despite briefly penetrating above it last week on an intraday basis. Thus, the series of lower highs and lows continues as silver demand has dwindled in the face of a stronger dollar.

Silver’s interim weakness has been in spite of strong demand for physical bullion coins. A couple of weeks ago, the U.S. Mint reported that sales of the hotly anticipated and newly designed 2021-W American Silver Eagle Proof coins sold out instantly once it became available.

Coin market observers, however, noted that the reason for the sell-out (besides high physical demand) was likely due to the fact that the coin could be purchased through an enrollment program where 10% of the product limit was available to bulk purchase dealers.

The Silver Institute, meanwhile, has forecast that physical investment, which covers silver bullion coin and bars, “is expected to achieve a six-year high in 2021 of 257 million ounces (Moz), as investors continue to add silver to their investment holdings.”

There’s no denying that demand for silver coins is quite high by historical standards, so the question that begs to be answered is: Why isn’t physical demand putting so much as a dent in silver’s price? The answer is that silver’s all-important industrial demand has been wanting of late.

The Institute for Supply Management’s July manufacturing index fell to a six-month low, in part due to broad shortages, but trade-related concerns involving major consumer China—along with China’s tightening of commodity prices by managing price indexes—is likely having a negative residual effect on the metal.

Moreover, jewelry demand for silver—another key driver—hasn’t yet completely recovered from last year’s pandemic-related drop in consumption. Jewelry demand fell by nearly 25% in 2020, and while a broad recovery was expected for this year, it hasn’t completely materialized as many silver-consuming nations are still under Covid-related restrictions.

A final consideration for silver’s intermediate-term price outlook is the speculative element. In my opinion, bullish sentiment for silver among large speculators and retail traders is absolutely essential to lifting prices in a sustained fashion. Without the speculative element, silver prices tend to languish regardless of how bullish its fundamental backdrop may be.

More than perhaps any other factor, enthusiasm for gold tends to sweep silver into the rising tide by increasing hunger for precious metals in general. And one of the best ways to leverage a gold bull market is by purchasing low-cost silver futures contracts and/or ETFs.

What this means is that before silver can launch its next sustained rally, we’ll need to see a drop in the 10-year Treasury yield (see gold discussion above), a weaker dollar and a strong return of fear based on increasing virus-related restrictions in the U.S. (one of the world’s top silver consumers).

The so-called silver “apes” who are hoarding physical coins aren’t sufficient by themselves to push prices higher. Again, I’m referring to market-moving futures and ETF traders. So, until silver’s all-important speculative element returns, participants can likely expect to see more of the same that we’ve seen from silver in the last couple of months.

What to Do Now
Wheaton Precious Metals (WPM) is a world-class precious metal streaming company, featuring a high-quality portfolio of long-life, low-cost assets. (Streaming companies make an upfront payment, plus a fixed payment per ounce of metal—often 20% of spot price—giving them the right to a percentage of a mine’s future production and allowing them to leverage rising metal prices.)

As the world’s largest silver streaming company, with 14 silver purchase agreements, as well as gold and palladium agreements, Wheaton focuses mainly on high-quality, high-margin operations with a goal of returning a minimum of 30% of cash flow to its shareholders, with the remainder used to grow the company. Aside from precious metals like silver, one of the main drivers behind Wheaton’s stock price right now is the company’s growing exposure to the valuable cobalt market (cobalt prices are up 75% from a year ago).

From a market timing perspective, the recent rally in WPM above the key 50-day moving average and subsequent failure could be a classic “head fake.” Recent quarterly earnings reports from other big-name silver miners have been mixed. For Coeur Mining (CDE), for example, revenue in Q2 was 39% higher from a year ago, but per-share earnings missed estimates by 11 cents. Hecla Mining (HL) Q2 revenue was 31% higher, but EPS barely beat estimates (by 1 cent). And SSR Mining (SSRM) beat both revenue and earnings estimates. Yet despite short-term earnings-related rallies, all three stocks ultimately faded in last week’s broad silver market weakness.

Earnings for Wheaton are expected this week on August 12, which will likely make or break the short-term trend for WPM. Accordingly, I recommend holding WPM down to slightly under the 42.50 level (stop) for now. HOLD

Copper Held Hostage by Strike Threat
A tense standoff relating to a worker’s strike at Chile’s Escondida, the world’s largest copper mine, is dominating the copper market right now. Earlier this month, miners approved a strike after rejecting the final contract offer proposed by mine owner BHP Group (BHP).

As the world’s top copper producer (accounting for 28 percent of global output), the strike proposal has created even more uncertainty for the copper mining industry, whose product is in high demand right now on the back of rising infrastructure spending, automotive and electrical/electronic component usage. The Escondida mine, moreover, accounts for some 5% of global production.

According to an August 6 Bloomberg report, “A months-long wage negotiation at the world’s biggest copper mine is heading into a tense finale over the coming days,” adding that “If the two sides fail to reach a deal by [Monday], they could agree to extend mediation for as many as five more business days or a legal strike could begin.”

In other words, this week will be a pivotal one for both BHP and the larger copper industry itself.

It’s worth noting that Escondida workers staged a 44-day strike in 2017, the longest in the history of Chilean mining.

The strike caused $740 million in losses for the company, and while the onset of the strike resulted in a brief rally for copper prices, the rally ultimately failed as prices resumed a downward trend for three months (down 10%) before finally bottoming out and launching a 7-month march higher for a 32% gain.

If history repeats, a legal strike could result in an initial flourish of prices higher, followed by another rally failure. However, an extended strike would almost certainly have a salutary effect on intermediate-to-longer-term copper supplies (which are already tight), thus likely paving the way for a major rally by later this year.

Additionally, with uncertainty surrounding the upcoming Chile elections and the recent confirmation of Peru’s socialist president Castillo, Freeport-McMoRan (FCX) and other big producers are putting new copper projects on hold as both countries discuss potential tax increases (including mining tax hikes), while Chile drafts a new constitution. This should also be supportive for red metal prices in the intermediate term.

As an aside, Goldman Sachs has reiterated a bullish series of copper price targets which will likely have a positive impact on the market due to that firm’s outsized influence. Goldman analyst Nicholas Snowdon published a series targets of $10,500, $11,000, and $11,500 in the next three, six and 12 months. The firm’s bullish bias is based on tightness in the refined and concentrate markets, as well as stricter policy announcements regarding electric vehicle adoption in the EU.

What to Do Now
After the recent strength in the physical market, I placed the United States Copper Index Fund (CPER), my preferred copper-tracking vehicle, on a speculative buy. Traders who don’t mind the near-term volatility risk purchased a conservative position in CPER after the recent pullback. I suggest using an initial stop-loss on this trading position slightly under the 26 level (intraday basis). HOLD

China is the X-Factor for Steel
Despite a recent drop in iron ore prices, steel remains firm on the back of strong infrastructure and automotive demand, with steel rebar prices up 14% from the May low.

As we’ve discussed in recent reports, a major driver in the global steel industry right now is China’s plan to decrease output, with an eye toward lowering carbon emissions as part of a long-term environmental goal.

While China’s steel mills have produced around 12% more crude steel in the first half of 2021, year-over-year, industry analysts expect production will be lower in the second half of the year with the expectation that this will have a lifting effect on prices (on top of underlying strong demand).

Stainless steel consumption in the rest of the world, moreover, has been in recovery mode this year as demand for stainless products improves from last year’s Covid-impacted industrial slump.

Meanwhile, leading steelmaker ArcelorMittal has upgraded its global steel consumption forecast for 2021 to between +7.5% and +8.5% above 2020 demand levels, following a strong first half. This compares to a previous 2021 growth estimate of +4.5% to +5.5%.

And though iron ore and steel prices have been variously impacted in the near term by China’s commodity curbs, major anticipated increases in U.S. infrastructure spending and automotive demand are expected to boost domestic demand and keep steel prices buoyant in the coming months.

What to Do Now
After the recent strength in steel prices, I placed steel and steel products manufacturer Nucor Corp. (NUE) on a buy. Traders last week purchased conservative position in NUE using the 96 level (or a level slightly below it) as the initial stop-loss on an intraday basis. NUE closed decisively above its 50-day moving average in late July after recently reporting a 103% year-over-year revenue increase, to nearly $9 billion, for Q2 while net earnings hit a quarterly record of $1.5 billion (versus $109 million in the year-ago quarter). Operating rates at Nucor’s steel mills climbed to 97% from 95% in Q1 and 68% from a year ago, while total steel mill shipments increased 41%. Management said it expects increased profitability across the steel mills segment going forward, and analysts anticipate 97% sales growth for Q3. BUY A HALF

Stainless Steel Demand Boosts Nickel
Strong demand for stainless steel, along with solid fundamentals, are keeping nickel prices elevated.

Steel-related demand for nickel (which accounts for around 70% of nickel end-use) has moved the metal from beyond being merely a “battery metal” and has propelled it into the refined metal market spotlight. Providing additional context for nickel market tightness is a report from the World Bureau of Metal Statistics which showed the global nickel market was in a deficit for the first half of 2021.

There’s no denying, however, that nickel’s luster in recent months is also the result of booming battery-related demand in the red-hot electric vehicle (EV) market. Benchmark nickel prices on the London Metal Exchange, at $19,550 a ton, are up over 20% since April and at their highest since February, partly in response to rising EV market demand for the metal.

Nickel supply, meanwhile, is under pressure due to disruptions at nickel mines in New Caledonia, Russia and Canada. Analysts estimate the market lost around 60,000 tons of nickel due to these disruptions, according to Reuters.

Providing some additional context, asset management firm Macquarie expects nickel demand to rise to almost 3 million tons this year, up 16% from 2020, with a deficit of 83,000 tons.

Macquarie cautioned, however, that a “relentless rise” in Indonesian production, along with an anticipated slowdown in nickel consumption growth, would likely push the market into over-supply in 2022-23.

What to Do Now
We recently added the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN) to our portfolio as a recommended buy. 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 recommended only a small, conservative position in this nickel-tracking vehicle. JJN was up around 10% by the end of July in the wake of the Tesla supply deal announcement. Accordingly, I recommended booking a partial profit in this stock (per the rules of or trading discipline). I also suggest raising the stop to slightly under 24.50 (halfway between the 25-day and 50-day moving averages) on an intraday basis on the remainder of this trading position. HOLD

Lithium Buoyant After White House Order
Barron’s has suggested that we have the White House to thank for the recent rally in lithium carbonate and lithium mining stock prices.

Specifically, the Biden Administration’s executive order calling for 50% of U.S. new car sales to be electric by 2030 has lit a fire under the stocks of several lithium producers.

To meet this goal, miners will need to produce an estimated 5 million tons of lithium per year, up nearly 13 times (!) from last year’s total production. It’s a tall order, and many analysts are skeptical that it can be reached.

Nevertheless, the market is clearly bullish on the prospects for the battery metal, and with our exposure to the sector via our favorite tracking ETF and junior mining stock (below), we’re not complaining.

What to Do Now
In June, I recommended that we buy into the Global X Lithium & Battery Tech ETF (LIT) on weakness. This ETF is what I view as a nice fit with our somewhat related positions in the cobalt (via Wheaton Precious Metals) and neodymium-Praseodymium (via MP Materials) spaces.

Investors who haven’t already done so should book some profit in our conservative trading position in LIT after its recent rally to over 20% from our initial entry point (per the rules of our technical trading discipline). I also suggest raising the stop-loss on the remainder of our position in LIT to slightly under 77.14 (halfway between where the 25-day and 50-day moving average come into play). HOLD

I previously recommended that lithium investors with a speculative bent take a closer look at Sigma Lithium Resources (SGMLF on the OTC, or SGMA on the Canadian TSX exchange). The company’s stated goal is to “enable EV industry growth by becoming one of the world’s largest, lowest cost producers of high-purity, environmentally sustainable lithium products” and it is developing a world-class lithium hard rock deposit with exceptional mineralogy at its Grota do Cirilo property in Brazil. Speculators interested in initiating a conservative position in SGMA were instructed to use weakness to nibble down to around the 6.14 level (stop) in the TSX symbol and down to around 5.00 (stop) in the OTC symbol. After the 20% rally in SGMLF on August 2, I suggested taking some profit and raising the stop-loss to slightly under 6.00 on an intraday basis for the remainder of this trading position. For the TSX symbol, I recommend raising the stop-loss to slightly under 6.75. [Caveat emptor: Unlike most recommendations made in this report, this is a fairly illiquid stock.] HOLD

Current Portfolio

StockPrice BoughtDate BoughtPrice on 8/9/21ProfitRating
Barrick Gold Corp. (GOLD)----Sold
Global X Lithium & Battery ETF (LIT)696/10/218624%Hold
GraniteShares Gold Trust (BAR)----Sold
iPath Bloomberg Nickel Subindex ETN247/9/21240%Hold
Nucor Corp. (NUE)1048/3/211084%Buy a Half
Sigma Lithium Resources (SGMLF)5.176/29/217.5646%Hold
United States Copper Fund (CPER)277/26/2126-4%Hold
Wheaton Precious Metals (WPM)486/2/2143-11%Hold

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 August 3, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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