SX Gold & Metals Advisor | July 13, 2021

After weeks of being constrained by the dollar’s rally and subsiding inflation concerns, gold finally has what looks to be a new “fear catalyst” to worry about going forward.

Gold still hasn’t confirmed a bottom, but we’re getting closer to one after the recent drop in Treasury yields and the increase in concern over the Delta variant of the coronavirus.

And while some additional near-term weakness is likely, the fundamentals underlying gold’s longer-term bull market remain intact.

We’ll also discuss the increasing strength in the suddenly white-hot lithium market, as well as the return of strength in the closely related nickel market.

Feature Story: Gold Now Has a New Fear Catalyst

As we talked about in the last report, gold is searching for a catalyst to justify its next extended bull run. I argued that without a clearly defined catalyst, gold’s price would likely remain range-bound between roughly the $1,700 and $1,900 levels for months to come. And while this is certainly still possible, recent developments suggest that by later this fall, gold will have found its “legs” again and thus be able to resume its long-term bull market.

Of all the major factors which drive the yellow metal’s price, the psychological fear component is arguably the most important. For nothing enhances gold’s allure as a safety haven than when investors become excessively worried over economic or geopolitical developments that might roil either the equity market or the currency market.

To that end, gold does have a likely “fear factor” on the horizon that could propel the metal’s price to higher levels by this fall. I’m referring of course to the Delta strain of the coronavirus which the media have become increasingly focused on.

Indeed, virus-related fears (or more specifically, economic worries arising from the political response to the virus) were chiefly responsible for gold’s strong performance last year. And in just the last couple of weeks, what started as a few sparse mentions has become an increasing drumbeat about a possible resurgence of virus cases by this fall’s upcoming cold-and-flu season.

If the virus does make a comeback this fall in mutated form, the ever-present threat of more shutdowns, mandates or other virus-related restrictions will weigh heavily on investors’ minds. And the cost of insurance to protect one’s portfolio against the ravages of further inflation (potentially induced by even more stimulus in the event of new lockdowns) is the price-per-ounce of gold (which currently stands at around $1,800).

Industry members have begun to take note of the obvious threat posed by a return of Covid restrictions this fall, with several institutional analysts upgrading their gold price forecasts.

Most recently, CMC Markets UK’s chief market analyst Michael Hewson told Reuters, “If there is going to be a slowdown in the global economy as a consequence of rising Delta variant cases that should be positive for gold,” a sentiment one would be hard-pressed to contradict.

Goldman Sachs, meanwhile, just upped its gold outlook even as short-term inflation fears subside. In a research note last week, Goldman analyst Mikhail Sprogis placed a $2,000-an-ounce target for gold, which he based on lower Treasury yields and “easing inflation concerns.” (Many precious metals investors hold Goldman’s forecasts in high regard, which gives them a weight far beyond that of most institutional analysts. Or to put another way, “When Goldman talks, people listen.”).

Aside from the new “fear factor,” gold also should enjoy a measure of support from the recent decline in the U.S. 10-year Treasury bond yield, as previously alluded to. Lower bond yields mean that non-yielding bullion has less competition from the Treasury market, with lower yields making gold look more attractive by comparison to safety-seeking investors.

From a technical perspective, the gold price hasn’t yet confirmed a bottom, although confirmation could soon be forthcoming. A decisive close above the 25-day moving average (see chart below) would be a big step in the right direction for gold and would tell us that the buyers are reasserting their control over the metal’s short-term trend.

Moreover, a weekly close above the 50-day line (at around $1,830) would all but confirm that the correction is over and that the bulls are back in a position of dominance while the bears have been swept aside.

And though it’s not absolutely essential for the U.S. dollar to be in decline in order for gold to catch a new safety-related bid from interested buyers, a weaker dollar would certainly help build the case for a renewed gold uptrend. Shown here is the dollar index (USD), which is still clearly elevated above its key short-term trend lines. A move below 91.50 in USD would almost certainly strengthen gold’s currency component enough to give gold buyers an even bigger incentive to raid the market and retake control.

Finally, on a side note, retail trader sentiment on gold is still too bullish (from a contrarian’s perspective) based on the latest IG Client positioning data released by DailyFX.

While the buyers haven’t yet returned with enough force to completely push the sellers back, the fact that gold now has a clearly defined fear catalyst ahead of it is good news for the metal’s intermediate-term prospects. And as we head closer to the fall months—which are typically bullish for gold from a seasonal perspective—that catalyst should come more clearly into focus, providing gold with renewed luster and giving haven-seekers a reason to give the metal a closer look.

What to Do Now
We recently exited our trading position in the iShares Gold Trust (IAU), our primary tracking vehicle for gold. I recommend holding off on initiating any new long positions in the gold ETF until we have confirmation that the U.S. dollar index has peaked and the gold price has bottomed. As mentioned above, we should also ideally see a diminution of bullish sentiment on gold (and an increase in gold short interest) before the next confirmed buy signal. Accordingly, let’s keep our powder dry as we wait for the next entry opportunity in the yellow metal.

New Recommendations/ Updates: Lithium Takes the Lead Among Metals

Are “Silver Stackers” a Problem?
While it remains in a position of relative strength versus gold, silver still hasn’t confirmed a bottom and remains under its key 25-day and 50-day moving averages as of this writing.

Investor sentiment for silver has been running too high for comfort lately which, from a contrarian’s perspective, is a concern. The elevated bullish sentiment on the white metal is preventing short interest from building to levels that would support a bull’s raid on the market to “run the shorts.”

Another near-term concern is in the physical bullion market, where a growing number of Reddit-inspired small investors are snapping up bullion coins in the hopes of galvanizing a massive short-covering event.

The basis of the movement is a Reddit community called Wall Street Silver, and its members call themselves “silver stackers” or “apes”—an insider reference to the movie, Planet of the Apes.

Many within this community believes that by purchasing as many bars and coins as they can, they can collectively run up silver prices by 100% or even 1,000%, “to the point where they can call the shots against the so-called bullion banks, the large financial institutions which lead trade in precious metals,” in the words of a recent Reuters article.

How much of an impact these Reddit community members are having on physical bullion supply is certainly questionable. But I don’t like seeing this much bullish retail trader sentiment for silver in a time in which the U.S. dollar (in which silver is priced) has been strengthening.

Ideally, traders should become more bearish as prices fall, not the other way around.

While there are times when even the retail crowd can end up correctly buying near a market low, in most cases, when the crowd starts buying physical silver hand-over-fist like the silver “apes” have, they’re usually premature in their optimism. For this reason, I’m going to avoid making any buy recommendations in the silver ETFs right now until we see definite technical evidence that the market has been fully cleared of selling pressure and is ripe for another extended rally.

At any rate, we’ll know the bottom is in for the latest internal correction when the silver price surges above its key moving averages, as mentioned earlier.

Fundamentally, however, nothing has changed to alter silver’s positive longer-term outlook. Indeed, a growing number of industry experts believe silver could go as high as $50 in the year ahead if the White House’s renewable energy plan is fully implemented. This would have the effect of increasing silver demand for use in electric vehicles (EV), solar panels and other alt-energy applications in which the metal is widely utilized.

Additional anticipated uses for silver in the foreseeable future include the continued 5G wireless network rollout, as previously discussed. For these reasons, I expect that silver’s recent woes will prove to be but a temporary setback in the face of a bull market that should be able to regain traction at some point in the coming months.

My observation is that purely emotion-driven price declines are reversed fairly quickly. So, if I’m correct that last week’s silver market slam was primarily a news-driven event (and not fundamental in nature), then we should see silver hitting bottom in the next few days. Assuming this happens, we could soon have another trading opportunity in silver. Stay tuned.

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 45% from a year ago). I recommend holding WPM down to slightly under the 42.50 level (stop). HOLD

Copper Gets Some More Good News
Copper’s recent weakness was largely blamed on the Federal Reserve when, after the central bank’s June meeting, the Fed suggested that it could begin tightening its monetary policy sooner than many market observers expected.

A more likely explanation for copper’s recent pullback from its May peak at $4.75 per pound to $4.10 last month (down 14%) was the People’s Bank of China’s recent currency market intervention to prevent the Yuan from becoming too strong, as well as that nation’s efforts in pushing industrial metals prices lower by releasing copper, aluminum and zinc from its reserves.

Yet state officials later revealed they would only release small quantities of base metals at a time, which the market has so far met with relief.

Indeed, the continuous contract copper futures price has inched higher in the last two weeks and is within kissing distance of closing back above its key 25-day line (below). This would be a first important step toward confirming a bottom for copper and getting the metal technically back on track for a rebound to its May peak.

It’s also worth mentioning that China raised investors’ expectations, contrary to previous statements, that it may actually ease monetary policy to support its economy (a potential plus for copper’s domestic industrial demand).

Moreover, the inflationary pressures we’ve been discussing in recent reports are still a major concern for the intermediate-term (6-9 month) outlook and should eventually come to copper’s aid. Continued strong demand for copper in the booming electric vehicles (EV), alternative energy and other industries should also contribute to copper’s longer-term strength.

What to Do Now
We recently initiated coverage of Taseko Mines (TGB), a copper play which is also as an ideal vehicle for gaining some exposure to the strong molybdenum market. 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’s Gibraltar mine boasts proven reserves of 53 million pounds of molybdenum. On the news front, the company was recently granted a permit that will allow it to continue its 2021 mining plan at Gibraltar without disruption. I regard TGB to be more of a longer-term “buy and hold” type play in contrast to most of our short-to-intermediate-term trading positions, hence the reason for my willingness to tolerate the recent weakness in this stock. HOLD

Steel Maintains Supporting Bids
Spot iron ore prices are up almost 2% in the last month, while U.S. Midwest Hot-Rolled Coil Steel prices are up by a far more respectable 9% month-over-month, near record highs and up a head-spinning 215% from a year ago.

Keeping steel prices buoyant while other metals have pulled back is the fact that many steel-intensive industries, such as oil and gas, are seeing steel demand continuing to expand as the economy reopens. Oil producers and refineries will likely consume more steel as Americans return to air travel and resume commuting to offices for work each day.

With U.S. Steel (X) and Cleveland-Cliffs (CLF) pretty much in control of the domestic steel market, there is little incentive for a significant supply increase, which should keep prices relatively buoyant in the foreseeable future.

Top consumer China, meanwhile, stated that it sees more potential for demand growth in the intermediate term. And an anticipated increase in automobile production once the global semiconductor shortage has been alleviated.

Speaking of China, recent monetary policy changes also support high steel prices. The People’s Bank said it would cut the reserve requirement ratio for all banks by 50 basis points, effective July 15, while releasing around 1 trillion yuan ($154 billion) in long-term liquidity “to underpin its post-Covid economic recovery that is starting to lose momentum,” per a CNBC report.

Steel and other industrial metals have so far reacted positively to the reserve requirements cut news.

Then there is the potential supporting bid from the environmental factor, as China is slated to cut steel output by over 50 million tons in the second half of 2021 in order to meet its carbon emissions targets.

Further boosting the intermediate-term steel outlook is the White House’s infrastructure plan, which is reportedly nearing passage by later this summer. It would provide over a trillion dollars for infrastructure spending, in turn providing a major boost for iron ore consumption and necessitating higher steel production volumes.

All told, last month’s weakness in the steel price was likely a temporary phenomenon that was needed to cool off the overheated market condition. Additional consolidation may be needed in the near term, but I expect that as we head closer to the fall months, the strength we saw earlier this spring in steel will eventually reassert itself.

What to Do Now
Cleveland-Cliffs (CLF) is one of North America’s largest integrated steel makers and is seeing higher steel demand (and higher steel prices) thanks to global economic recovery and tight supplies. Recent quarterly results provided some insights into why things are rolling for Cleveland-Cliffs, as discussed in previous issues. Since then, Bank of America has reinstated coverage of the company with a “buy” rating and an upside target of 25, referring to it as a free cash flow “machine.” I recommended several weeks ago that investors maintain our recently purchased conservative position in CLF. I now suggest that we raise the stop-loss on this position to slightly under the 19 level on an intraday basis; a break under this level would decisively violate the 50-day line and thereby invite further technical selling. HOLD

Rare Earths: Neodymium-Praseodymium
Neodymium-Praseodymium alloy is highly valued in several global manufacturing and high-tech applications—including the high-value electric vehicle (EV) market—and analysts forecast that neodymium in particular will lead the rare-earth metals market in terms of value, particularly in China.

MP Materials (MP) is regarded as one of the biggest (if not the biggest) rare earths producers in the Western Hemisphere, currently accounting for around 15% of total global supply and with most of its production taking place at its Mountain Pass, California mining site.

Most of the resulting rare earth concentrates MP produces are eventually sold to China through an intermediary (where those concentrates are processed). However, the company is working towards completing a Stage II optimization project next year that would allow the firm to bypass the middleman by fully processing the materials and selling rare earths straight to end-users.

Upon completion, Stage II is expected to produce around 20,000 metric tons of separated rare earth oxides annually, including over 6,000 metric tons per year of Neodymium-Praseodymium, which in turn will be used primarily to make magnets for the EV market, as well as for wind turbines, drones and robots.

MP Materials also boasts strong balance sheet with cash and equivalents of $1.2 billion (including $672 million in net proceeds raised through a convertible “green bond” offering—the largest in the country, according to MP). Its liquidity position was further increased by $21 million in free cash flow during the quarter.

Looking ahead, analysts expect the company to grow the full-year 2021 top and bottom lines by 74% and 86%, respectively, with continued double-digit earnings and revenue growth in the next two years. It’s a solid story and worth a closer look, in my opinion, if you’re looking to gain some exposure to the rare earths space.

Helping the case for MP has been a series of recent analyst upgrades as several major Wall Street institutions have upped their share price targets. Last month, J.P. Morgan initiated coverage on MP with an overweight rating and a $41 price target.

Then followed Baird, which initiated coverage with an overweight rating and a $45 price, noting that MP’s main asset, Mountain Pass, is “one of the largest integrated rare earth mining and processing facilities in the world.”

Further boosting MP’s case, the stock was recently added to the Russell 3000 Index during its annual rebalancing, giving it some added visibility and prestige among investors.

What to Do Now
I previously instated a buy recommendation on MP and reiterate that investors can purchase a half position in the stock on weakness, using a level slightly under the pivotal 25 level as the initial stop-loss on a closing basis. I now recommend taking partial profits in MP after its 19% rally from our initial entry point. I further suggest raising the stop to slightly under the 33.25 level on a closing basis (under the 25-day line). HOLD

Lithium Soars on Bullish EV Outlook
At its nadir in May, things looked pretty bleak for the lithium industry. Left-wing political groups won a vote to revise the constitution for Chile, the world’s second largest lithium producing country.

The victory increased concerns that Chile’s government might be overturned in elections later this year and replaced by parties calling for higher mining taxes and increased regulatory control over private mines.

These fears were quickly allayed, however, as major lithium producers all over the world have predicted higher prices for the metal in the wake of increased demand in the red-hot electric vehicle (EV) market. The basis for this prediction was the remarkable 40% year-over-year increase in global EV sales in 2020 despite an overall sales decline for legacy automobiles.

Lithium demand is expected to triple by 2025, and driving this anticipated demand will be the growing need for rechargeable lithium-ion batteries for the EV market, accounting for around 80% of total lithium demand by 2030, from 40% today.

Further, according to ratings agency Fitch, lithium consumption could grow as much as seven times over the next 10 years, based on a projected EV annual sales growth from 3 million today to 21 million units by 2030.

Fitch sees Chinese lithium carbonate 99.5% prices averaging $13,450 per ton in 2021, increasing to an average $15,025 per ton 2022. Chinese lithium hydroxide monohydrate 56.5% prices, meanwhile, are expected to average $11,950 this year and $14,300 next year.

Finally, Fitch expects China to maintain its leadership role as the world’s largest battery maker by a wide margin, accounting for around 80% of installed manufacturing capacity as of 2020. By the same token, countries including Japan, South Korea and the U.S. will also likely increase battery manufacturing in the coming years.

All the above-mentioned factors should translate into higher lithium prices and, by extension, outperformance for publicly traded lithium producers. Indeed, lithium and lithium stocks have been on the upswing lately, making it one of the top-performing segments of the overall metals sector in recent weeks.

For the first time in several months, we now have an established momentum market in lithium. While this increases the chances that our lithium positions will benefit from it, it also means volatility risk will also increase. Accordingly, I recommend keeping a close watch on our open long positions and adjusting stops along the way as recommended in this report.

What to Do Now
Last month, 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. We took some profit in LIT recently after its gain of over 10% from our initial entry point, and I also recommend raising the stop-loss on the remainder of the position to slightly under 70 where the influence of the 25-day line can be seen in the daily chart. HOLD

Lithium investors with a speculative bent may want to 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 is developing a world-class lithium hard rock deposit with exceptional mineralogy at its Grota do Cirilo property in Brazil. Located close to the Atlantic emerging supply chain for electric vehicles in North America and Europe, Phase 2 would enable Sigma to continue to be among the lowest cost producers in the industry, according to the company’s latest statement. Speculators interested in initiating a conservative position in SGMA can use weakness to nibble down to around the 5.50 level (stop) in the TSX symbol and down to around 4.50 (stop) in the OTC symbol. [Caveat emptor: unlike most recommendations made in this report, this is a fairly illiquid stock.] BUY A HALF ON WEAKNESS

The EV Opportunity in Nickel
While most participants are aware of how critical lithium is for batteries used by EVs, it’s not as commonly known that nickel also has an important use in the auto market as a battery mineral. As The Nickel Institute recently observed:

“Using nickel in car batteries offers greater energy density and storage at lower cost, delivering a longer range for vehicles, currently one of the restraints to EV uptake.”

Informed investors are waking up to the potential of this metal, as evidenced by the turnaround in nickel prices in recent months. After topping out at just under $19,700 per ton in February, the LME nickel price fell to $16,000 before reversing in April and recently hitting $18,540 (up 16%).

The turnaround process has been so imperceptibly slow that most metal investors seemed to have forgotten the once-hot nickel market even exists. But recent market clues suggest that there’s an intermediate-term opportunity in this industry-critical metal.

Aside from the recent uptick of interest among institutional investors for nickel, the metal—along with other battery minerals—is benefiting from the White House’s interest in obtaining rare earth minerals from sources outside of China. On June 8, the White House stated:

“The government, working with private sector and non-governmental stakeholders, should encourage the development and adoption of comprehensive sustainability standards for essential minerals, such as lithium, cobalt, nickel, copper, rare earth elements, and other materials.”

The White House further announced the Department of Defense has invested “in the expansion of the largest rare earth element mining and processing company outside of China” for environmental reasons. Investors interpreted the statement as being beneficial for nickel prices, and the metal’s performance to date has justified the sanguine outlook.

WHAT TO DO NOW
On June 9, I 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’m recommending only a small, conservative position in this nickel-tracking vehicle. I’m suggesting an initial stop-loss slightly under the 22.27 level (nearly pivotal low from June 18) on a closing basis. BUY A HALF

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 July 27, 2021.

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