Exciting Times for Battery Metals
As gold struggles to gain traction in the face of new virus-related fears and silver languishes, the battery metals have taken a commanding lead over the precious metals.
What began as an explosive lithium price upmove earlier this spring has since expanded to include nickel, another key metal for the red-hot electric vehicle (EV) market. Our exposure to both metals—via market-tracking ETFs and ETNs—has allowed us to participate in what has so far been an exciting summer rally for both metals.
Meanwhile, another key industrial metal—copper—is showing signs of returning to a position of strength after a two-month slump. And while steel hasn’t yet joined the party, there are preliminary signs that a steel market rebound could be in the works.
There is still time too to join me and my fellow Cabot Wealth analysts for our 9th Annual Smarter Investing, Greater Profits Online Conference, August 17-19, where we will present our look ahead and some of our best picks for the next year.
Feature Story: Gold: A Tale of Two Summers
“It was the best of times, it was the worst of times…it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…”
So goes the immortal opening line from Charles Dickens’ A Tale of Two Cities, which he used to describe the paradoxical conditions in England and France prior to the outbreak of the French Revolution. And while it may seem trite, I believe the description can be applied to the current global sociopolitical and economic situation.
Specifically, the U.S. economy is experiencing something of a post-Covid resurgence as millions of Americans are enjoying what some are calling the “summer of love.” After last year’s restrictions, masks have come off while Americans swarm beaches and other touristy hot spots as pent-up demand for recreation and summer fun roars back. Indeed, in a great many locations throughout the U.S., it’s as if the pandemic never happened and normality has returned.
Yet in many other nations around the world, we find the exact opposite situation. In countries like Canada, Australia, the U.K., France and Italy, virus-related restrictions and “vaccine pass” proposals have resulted in a massive public backlash, sparking widespread street protests in places like Paris and London.
In many ways, the public’s simmering anger in nations around the globe is reminiscent of the worldwide protests that took place in 2019 before the pandemic started. Historically, widespread global anger is a prelude to further social, political—and in many cases—economic turbulence (as it proved to be in 2020). What’s more, when anger tends to be this widespread, the reverberations are eventually felt in virtually every corner of the globe, including the U.S.
It’s with great interest, then, that I survey the global protests, for while the U.S. enjoys relative peace and prosperity this summer, it’s quite possible that the coming months could witness a recrudescence of last year’s turmoil.
To wit, the Delta variant of the coronavirus is starting to gain currency in the U.S. media, and already there have been noises to the effect that masks and other restrictions may be reintroduced this fall, which could lead to more supply shortages—or what University of Massachusetts economics professor Arindrajit Dube calls “pandemic economics.”
Another factor that has stimulated some safety-related demand for gold is the worry that the U.S. is entering another prolonged period of “stagflation,” similar to the kind experienced in the 1970s. This was the subject of an editorial by Randall Forsyth in last week’s issue of Barron’s. Quoting former AllianceBernstein chief economist Joseph Carson, Forsyth noted that the Consumer Price Index (CPI):
“…would be rising at double-digits rates similar to those in the 1970s if the index were calculated the old way [i.e. if government statistics didn’t exclude housing prices].”
Indeed, weaker growth expectations have likely been factored into the Treasury market in the form of lower yields. After peaking around 17.50 in March, the 10-year Treasury Yield Index (TNX) has fallen to a recent low of 12, which amounts to a 30% drop—by far the biggest bond yield decline since early 2020 when the pandemic panic started.
Lower bond yields are another clue that investors are becoming more risk averse and are looking to hedge equity market risk. While the U.S. dollar index remains strong due to the liquidation underway in some areas of the stock market (e.g. economically-sensitive industries like airlines, hotels and travel stocks), gold is surely coming back on investors’ radars as a potential safe haven should there be another big outbreak of the virus this fall.
It’s my view that the fear of more restrictions (which would presumably hinder the economic recovery) has kept gold fairly buoyant in recent months in spite of a strong U.S. dollar. Lower Treasury yields have meant less competition for non-yielding gold; the following graph illustrates gold’s relative outperformance versus the 10-year yield index in recent weeks.
This is one of five major factors that typically determine gold’s intermediate-term (3-6 month) direction. Another one is leadership in the white metal palladium, which tends to lead gold at key turning points. The following graph compares the gold price (gold line) with palladium (black line), and as is normally the case, palladium has provided both bullish and bearish leadership clues in the last several months. Most recently, palladium’s rally in June gave the “heads-up” signal for gold to follow suit in July.
The only key factor that is holding gold back from rallying at this point is the lack of confirmation in the silver market. As gold’s “sister” metal, silver should always lead (or else keep pace with) gold’s rallies. 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.
Nonetheless, the preliminary strength in palladium and lower Treasury bond yields—along with growing Delta variant worries—are key factors telling us that the gold price is preparing for another leg higher this fall. As always, we’ll keep a close watch on the key indicators for signs that the bulls have decisively regained control over gold’s interim trend.
For now, though, a measure of caution is still in order as we wait for all the pieces to fall into place. And as we head closer into what could be a “long, dark autumn” for the U.S., this would be welcome news for gold.
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 suggest using a tight stop-loss at this time for BAR since gold isn’t completely in the clear yet (with regard to silver’s lack of confirmation). Accordingly, I suggest exiting long positions in BAR if the 17.66 level is decisively violated on an intraday basis. BUY A HALF
New Recommendations/ Updates
Silver Miners Remain Weak
As is often the case with the white metal, some of the biggest “blue-chip” silver mining stocks have been leading the physical silver market lower.
While the front-month silver futures price is hovering around $25 per ounce, stocks like Pan American Silver (PAAS) and Coeur Mining (CDE) have recently fallen to new lows. The relative weakness of some of the leading silver miners has not only served as a warning that the physical metal is in weak hands, but is a sign that dollar strength is still weighing on the silver complex.
Then there’s the concern involving the Reddit community called Wall Street Silver (with its members calling themselves “silver stackers.”) 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%.
How much of an impact these Reddit community members are having on physical bullion supply is debatable, but as previously mentioned, it’s not ideal to see 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.
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 leading silver mining stocks (like PAAS and CDE) turn around and the silver price surges above its key moving averages, as previously discussed.
To that end, the next few days will likely prove instructive. For Coeur Mining, second-quarter earnings are due out on Wednesday, July 28, and a bullish report could give the stock a much-needed boost higher. (Analysts expect Coeur will report a substantial year-over-year increase in both earnings and revenue for Q2.) Pan American Silver, meanwhile, will announce Q2 earnings on August 10.
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). I recommend holding WPM down to slightly under the 42.50 level (stop). Earnings are expected on August 12. HOLD
Copper Supply Impacted by South American Politics
Will South America’s recent turn toward the left wing of the political spectrum help copper miners? That’s the conclusion of at least one big-name mining company executive, who sees political uncertainty in major copper mining countries Chile and Peru as reasons to expect buoyant red metal prices in the coming years.
Last week during a conference call, Freeport-McMoRan CEO Richard Adkerson indicated that political uncertainty in both countries—which collectively account for around 40% of global production—would likely boost prices in the intermediate-to-longer-term outlook. It’s believed, moreover, that as the global economy moves closer to alternate energy, copper will come into increasingly higher demand to meet those energy needs.
Due to the uncertainty surrounding the upcoming Chile elections and the recent confirmation of Peru’s socialist president Pedro Castillo, Freeport 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.
“We really don’t know what the outcome is, bottom line,” Adkerson said. “This is going to be supportive of future copper prices.”
In other words, supply constraints for copper will likely continue in the foreseeable future due to political volatility. And that should be overall supportive for prices going forward.
Meanwhile, Freeport last week announced consensus-beating Q2 earnings and increased its full-year copper sales guidance. Earnings of 77 cents per share were 2 cents higher than expectations and 74 cents higher than a year ago (due to the easy comparison). Revenue of $5.8 billion was 89% higher, but missed the consensus expectation by $80 million, thus resulting in a muted reaction for FCX’s stock price.
Freeport also bumped its copper sales forecast slightly higher than prior estimates, to around 3.85 million pounds, while predicting gold sales of 1.3 million ounces.
Other highlights of Freeport’s earnings call were the firm’s reduction of net debt (by $2.7 billion), which achieved its targeted net debt level. Adkerson said this positions the company for “increasing cash returns to shareholders and investments in future growth.”
Additionally, Freeport said its average realized price received for copper in Q2 increased 70%, to $4.34 per pounds, while average unit net cash costs were $1.48 and are expected to average $1.35 for the full year.
The copper price predictions were well received by the market, which resulted in an outsized rally in the copper price (given the persistence of U.S. dollar strength). Accordingly, copper futures prices managed to close above both the 25-day and 50-day moving averages on a weekly basis for the first time since confirming a sell signal back in June.
What to Do Now
After the recent strength in the physical market, I’m placing 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 can purchase a conservative position in CPER (preferably on pullbacks). I suggest using an initial stop-loss on this trading position slightly under the 26 level (intraday basis). BUY A HALF
Steel Prices Supported by Infrastructure Spending
Iron ore futures on China’s Dalian Commodity Exchanged fell 10% last week, the biggest weekly loss in 17 months and down 17% from this year’s peak, as China’s drive to lower steel output has prompted mills to cut production to avoid sanctions.
China’s government has pushed ahead with plans to decrease steel output with an eye toward lowering carbon emissions as part of a long-term environmental goal.
Despite the setback in iron ore, however, global steel production increased 12% from a year ago in June, as crude steel output climbed 168 million tons in that month, according to data from the World Steel Association (WSA).
On a month-over-month basis, steel production was 0.5% lower, while Chinese production declined by 2.5%.
Outside of China, steel production was considerably higher in June. India’s steel output rose 21% for the month, and production in the U.S. and Japan soared 44%, according to WSA data.
While steel prices have been negatively impacted in the near term by China’s production cuts, 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.
At the present time, moreover, benchmark steel rebar prices are just 7% below the May peak for this year. Nevertheless, a decisive close above the 50-day line in the VanEck Vectors Steel ETF (SLX) is needed to confirm a bullish change of character in the market and before we initiate new trading positions in the steel space.
Elsewhere, Cleveland-Cliffs (CLF) reported several records in its second quarter last week, including for revenue, quarterly net income and quarterly adjusted EBITDA.
Revenue of $5 billion was $50 million above consensus and 360% higher from a year ago (due partly to the easy comparison). Per-share earnings of $1.43 missed the consensus by 8 cents, however. The news was greeted with little enthusiasm by Wall Street, yet neither there any selling pressure evident.
For the full year, analysts predict that CLF’s top line will be 280% higher. Meanwhile, some of Wall Street’s biggest institutions have upgraded CLF’s share price outlook based on the expectation that the company will continue to outperform while steel prices remain buoyant based on the aforementioned increase in infrastructure and automotive industry demand.
Is it time to go long Cleveland-Cliffs again? I’m not quite ready to put the stock back on our buy list, but if we see additional improvement in steel prices—along with supporting strength in some of the biggest publicly-traded domestic steel companies, like U.S. Steel (X), Steel Dynamics (STLD) and Nucor (NUE)—we’ll likely have another nibbling opportunity in CLF in the near future.
Tesla Deal Boosts Nickel Market
The nickel market was jolted higher last week in the wake of the big news that Tesla (TSLA) had signed a nickel-supply deal with BHP Group (BHP) in an effort to insulate itself against future supply shocks.
Under the terms of the agreement, BHP will supply the electric car maker with metal from its Nickel West operation in Western Australia. Both companies indicated the deal is designed to help Tesla secure a stable nickel supply in order to “make the battery supply chain more sustainable.”
Tesla’s CEO Elon Musk has been pushing miners to produce more of the key battery metal, as experts forecast nickel demand will soar in the face of mushrooming electric vehicle (EV) demand in the coming years. (Nickel has become the preferred choice in EV batteries over cobalt, due to its lower cost and more transparent supply chain.)
Meanwhile, nickel prices are on the upswing again, recently hitting $20,000 for the first time since February, according to data provided by Benchmark Mineral Intelligence (BMI). Nickel use was up over 150% in May (the most recent month in which data is available) from a year ago. On a per-vehicle basis (including hybrids), nickel use is up 4%, according to BMI.
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. JJN was up 6% last week in the wake of the Tesla supply deal announcement. 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 suggested an initial stop-loss slightly under the 22.27 level (nearly pivotal low from June 18). After last week’s rally, however, I now recommend raising the stop to slightly under 23.67 (50-day moving average) on an intraday basis. HOLD
Lithium Stays Strong
While lithium prices to date in 2021 are averaging just $10,800 (down 35% from a year ago), average lithium on a per-vehicle basis use was up 20% year over year in May, according to recent Benchmark Mineral Intelligence (BMI) data.
Meanwhile, total lithium deployed increased 196%, with carbonate accounting for 49% of the total versus hydroxide (but with the latter favored in the production of high-nickel batteries). Industry analysts are projecting soaring lithium demand in the coming year based on stringent targets for carbon emission reductions worldwide.
In industry news, General Motors (GM) recently formed a strategic alliance with Controlled Thermal Resources to secure low-cost lithium for its EV batteries. The lithium will be produced through a closed-loop, direct extraction process resulting in a smaller physical footprint and lower CO2 emissions versus the traditional pit mining or evaporation pond production methods.
Elsewhere, Tesla has applied for a patent on a new lithium extraction process that Elon Musk previously described as “using table salt to basically extract lithium from ore.”
The process is expected to reduce lithium costs for the electric car maker by 33%. Tesla intends to use the method on its new 10,000-acre lithium claim deposit in Nevada.
What to Do Now
Last month, I recommended that we buy into the Global X Lithium & Battery Tech ETF (LIT) on weakness. Investors who haven’t already done so should book some profit in our conservative trading position in LIT after its recent rally to well above 10% from our initial entry point (per the rules of our technical trading discipline). I further suggest raising the stop-loss on the remainder of this position to slightly under 72.65 (halfway between where the 25-day and 50-day moving average come into play) on an intraday basis. 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. Speculators interested in initiating a conservative position in SGMA can 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. [Caveat emptor: Unlike most recommendations made in this report, this is a fairly illiquid stock.] BUY A HALF ON WEAKNESS
Current Portfolio
| Stock | Price Bought | Date Bought | Price on 7/26/21 | Profit | Rating |
| Global X Lithium & Battery ETF (LIT) | 69 | 6/10/21 | 80 | 17% | Hold |
| GraniteShares Gold Trust (BAR) | 18 | 7/16/21 | 18 | -1% | Buy a Half |
| iPath Bloomberg Nickel Subindex ETN (JJN) | 24 | 7/9/21 | 26 | 6% | Hold |
| Sigma Lithium Resources (SGMLF) | 5.17 | 6/29/21 | 5.35 | 3% | Buy a Half |
| United States Copper Fund (CPER) | New | - | - | - | Buy a Half |
| Wheaton Precious Metals (WPM) | 48 | 6/2/21 | 44 | -8% | 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
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