Inflation is Back
What happens when you mix runaway fiscal stimulus with an extremely loose central bank monetary policy and restricted economic output?
The plain and simple answer is: inflation.
The dreaded “I” word is likely to be a major theme heading into the second half of 2021. But while inflation may result in a slowing economy, rising commodity prices resulting from tight supplies and excess liquidity will be a boon for investors prescient enough to recognize the inflationary threat and have some exposure to the precious, base and industrial metals that are presently in high demand.
On that score, one of the major turnaround stories I anticipate for the coming months involves the so-called “barbarous relic,” gold.
The yellow metal’s revival is more than just a response to the increasing threat of inflation, however. Gold is benefiting from recent weakness in Treasury yields, as well as from the erosion of the U.S. dollar’s value (in which gold is priced).
Other metals benefiting from the weak dollar/rising inflation narrative include: silver, platinum, copper and steel—each of which are discussed in the latest report.
Feature Story: Metals’ Strength Signals Inflation’s Arrival
What happens when you mix runaway fiscal stimulus with an extremely loose central bank monetary policy and restricted economic output? The plain and simple answer is: inflation.
The classical definition of inflation, in laymen’s terms, is “too much money chasing too few goods and services.” It’s the result of an ever-accelerating money supply meeting up with a reduction in the output of economic goods (defined as “a product or service which can command a price when sold”).
A startling graphic that underscores just how much money has been created since last year’s pandemic response can be seen here. The M1 money stock graph (courtesy of the St. Louis Fed) illustrates the vigorous extent to which money supply has expanded since last April.
What’s more, a growing number of signs point to inflation making its malevolent presence known in various parts of the U.S. economy. Consider the following graph which shows the 5-year breakeven inflation rate.
This indicator is based on a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities. It suggests what participants expect inflation to be in the next five years.
As you can see, this indicator is currently at its highest rate in 10 years and is up over 100% from a year ago. It’s an undeniable sign that the market expects more inflation down the road.
The latest release of the Consumer Price Index (CPI) statistics, moreover, revealed a 2.6% year-over-year increase in inflation (versus the weak price action of March 2020) and is widely expected to climb for an 11th consecutive month in April’s report.
What’s more, many economists expect the annual inflation rate could climb above 3.5% for the first time since 2011 (a forecast which I think will prove too conservative).
Granted that most of the recent inflation is coming from significantly higher energy prices, which is by far the most volatile component of the CPI index. But energy costs alone can’t account for the renewed upward trend in domestic price inflation. It’s being seen in other areas as well, including in retail food prices.
Perhaps nowhere is inflation’s sting being felt more intensely than in the red-hot U.S. housing market. Soaring homebuilding demand, coupled with diminished housing inventories, has priced out countless numbers of prospective homebuyers. But lumber prices, which hit a record high of $1,400 per thousand board feet last week—an eye-popping sevenfold gain from the year-ago low—are another example of how inflation is impacting this important segment of the economy.
According to the National Association of Home Builders, soaring lumber prices alone have added an extra $35,872 to the cost of a new single-family home. It should therefore come as no surprise that after new home sales hit a 14-year high in August 2020, the number of new homes sold fell bey 27% through February 2021.
Other signs harbingering inflation include the S&P GSCI Spot Index, which tracks price movements of 24 raw materials, is up 24% in the year to date. This in turn reflects the persistent weakness of the U.S. dollar index in which commodities are priced over the past year (down 13%).
All the aforementioned signs are of significance for metal investors since inflation is generally supportive for all metals—base and precious—but particularly for gold prices. Indeed, the yellow metal has long been used as a store of value to protect investors from inflation’s ravages.
Last year gold futures gained almost 25%, its biggest yearly increase in a decade, thanks to last year’s Covid-related panic and fears relating to the global recession. But gold prices sagged starting last August as rising confidence in the economic growth outlook in China and greater Asia overcame previous fears of a massive, multi-year worldwide slowdown.
However, recent events (including renewed dollar weakness) have conspired to revive gold’s fortunes. The yellow metal has since risen some 10% from its March 2021 low of $1,680 and has established a series of higher highs and lows, which suggests that a new intermediate-term upward trend is likely underway. (The recent breakout above the pivotal $1,800 level also likely served as a catalyst for short covering, as the bears were forced out of unprofitable positions.)
Gold’s revival is more than just a response to the increasing threat of inflation, however. Gold is benefiting from the latest weakness in Treasury yields. Gold competes with Treasuries for safe-haven investors since Treasury bonds offer a yield and gold does not.
A major reason for gold’s weakness between last August and March was the persistent rise in the 10-year Treasury yield. But with bond yields recently showing weakness, gold now has attracted the attention of safety-oriented participants, as evinced by its rally over the last couple of months.
But by far the biggest factor underpinning gold’s turnaround, in my estimation, is the return of the metal’s number-one, all-time bull market catalyst: fear. More than even inflation itself, gold’s price is heavily influenced by worries over economic, financial market and geopolitical concerns among investors.
Last year’s pandemic gave gold prices a decisive fear-induced boost, but the subsequent stimulus packages and vaccine rollouts diminished that fear, prompting investors to unload the yellow metal.
Now that inflation is on the rise, U.S. taxes are set to increase and worries over a possible stock market bubble are on the forefront of investors’ minds, gold has caught a new series of fear catalysts. It’s my view that these fears will prove to be both pervasive and persistent, providing gold with a nice tailwind to further keep the turnaround story alive.
What To Do Now
If you haven’t already done so, buy a conservative position (i.e. don’t over-allocate it in your portfolio) in the iShares Gold Trust (IAU). This is my preferred gold-tracking vehicle of choice and is the most actively traded of the U.S.-listed gold ETFs. I suggest using an initial stop-loss slightly under the $1,780 level (avoid using round numbers when initiating protective stop orders due to the tendency for stop orders to build up at these levels, hence contributing to a “running of the stops” by large speculators). BUY
New Recommendations/ Updates: A Review of the Strongest Metals
As is typically the case in a sustainable gold bull market, the shares of companies that explore for and mine the physical metal typically exceed gold price in performance. The leverage factor for mining stocks is well established, with actively traded mid-tier and senior miners often outperforming gold by a factor of 2-to-1 or even 3-to-1 on average. (It’s not uncommon for junior mining stocks to outperform gold by an even greater factor.)
Barrick Gold (GOLD)
One of my favorite plays on the gold mining stock strength I expect in the coming months is Barrick Gold (GOLD), the world’s second-largest gold mining company. Indeed, Barrick is exceptionally well positioned to benefit from the gold turnaround that is now unfolding. The yellow metal’s improving fortunes allowed the company to deliver 125% per-share earnings growth in 2020, while revenue (up 28% for the year) has been trending higher since 2018.
Barrick forecasts all-in sustaining costs (a measure of how cheaply a firm can mine gold) at around $929 per ounce as of last year’s fourth quarter—well below current prices of around $1,833 per ounce—and giving the firm plenty of room to take on additional projects. Consequently, analysts are predicting even more top- and bottom-line growth in the first half of 2021.
The company is also disposing of non-core assets, rapidly paring its long-term debt and has announced a 10-year plan to become the world’s most valued bullion company. All told, Barrick has every reason to be optimistic about its future.
What To Do Now
Barrick shares can be lightly purchased here, with a protective stop slightly under the 26 level where the psychologically significant 50-day moving average is currently found. BUY
Newmont Mining (NEM)
Among blue-chip miners, the one that stands out right now as having the most conspicuous amount of relative strength—both versus the benchmark PHLX Gold/Silver Index (XAU) and the S&P 500 Index (SPX)—is Newmont Mining (NEM).
Newmont has, in fact, been a leader in the present gold mining stock rally, having been the first of the senior miners to achieve new highs for the year in April. It’s not only in a strong technical position, but in a solid fundamental position as well.
Newmont holds the distinction of being the world’s largest gold mining company, with mines throughout North and South America, Australia, Ghana and Suriname. Aside from gold, the company also mines silver, copper, zinc and lead.
projected to be between 6.2 and 6.7 million ounces through 2023. All-in sustaining costs, meanwhile, are expected to be around $970 per ounce this year, and between $850 and $950 per ounce for 2022.
For 2021, analysts expect Newmont’s top line to increase 15% from a year ago, while the bottom line is predicted to rise 33%. It’s a solid mining story and I believe Newmont stock should be a part of every long-term precious metals portfolio.
What To Do Now
Investors can do some nibbling in Newmont here or (preferably) on minor pullbacks. Suggested stop-loss slightly under the 62 level where the 50-day line comes into play. BUY
Silver Slowly Strengthens
Lost in the latest excitement over the bull market in other major metals like copper is gold’s sister metal—silver.
While metals like copper, gold, palladium and steel have captured much of the investing world’s rapt attention, silver has been largely relegated to the sidelines and its price has conspicuously underperformed the other metals.
But the latest indications suggest that silver has awoken from its long winter’s slumber and is in the process of launching a renewed bull market of its own.
Since bottoming at the $24 per ounce level on March 30, the white metal has gained some 15% and is back above its rising 25-day and 50-day moving averages (which I regard as key short- and intermediate-term trendlines for gauging the metal’s price strength).
One important takeaway from past precious metal bull markets is that whenever gold demand is persistently high, silver sooner or later tends to outperform gold in percentage terms. Since more participants can afford to buy large quantities of the white metal, its volatility factor is magnified and the aggregate force of buyers push its price to far greater heights in percentage terms.
Also, because the silver market is much smaller than the gold market, it doesn’t require nearly as much buying to push prices higher. That said, whenever gold is in high demand, it’s usually just a matter of time before silver joins the parade.
From a market psychology perspective, net-bullish positioning in silver futures was at its lowest level in a year as of late April, according to CFTC data. This was a classic contrarian signal that a short-covering rally was imminent.
Moreover, industry participants expect higher demand for physical silver in 2021, according to the latest World Silver Survey by the Silver Institute. Analysts also anticipate demand for silver bullion and coins will increase 16% this year. All said, this is an encouraging fundamental backdrop for the metal going forward.
Silver still hasn’t quite caught up to gold in terms of relative price performance. But with inflationary pressures on the rise, I expect silver’s price to eventually catch up to, and even surpass, that of gold.
What To Do Now
Aggressive investors can purchase a conservative position in the iShares Silver Trust (SLV). This is my preferred silver-tracking vehicle of choice and is one of the most actively traded of the U.S.-listed silver ETFs. I suggest using an initial stop-loss slightly under the 24.10 level (which is the current position of the 25-day moving average). AGGRESSIVE INVESTORS CAN BUY
Platinum Heats Up on Automotive Strength
One of the most inflation-sensitive metals is platinum, mainly because of its reputation as an investment-quality precious metal, but also due to its heavy use in several high-value industries.
In fact, platinum prices are now at their highest level in six years. The primary drivers include inflation, as well growing worries that the runaway rally in financial markets has created a “bubble” scenario that might end with an implosion (similar to what happened during the 2008 credit crash).
Most actively traded platinum futures have risen around 20% as of the first few months of 2021, outperforming most other precious metals. Since last March, moreover, platinum prices have more than doubled.
Exchange-traded funds (ETFs) backed by platinum owned nearly 4 million troy ounces of the metal at the end of January 2021, up from 3.4 million a year earlier, according to the World Platinum Investment Council. Clearly, platinum demand is on the upswing and isn’t likely to abate anytime soon.
Among the chief drivers for platinum strength in the past year has been its use in the white-hot automotive market. Platinum has long been used in autocatalysts, with automotive demand the single largest demand segment for platinum, accounting for around 40% of annual platinum demand.
(An autocatalyst is a device that reduces harmful emissions from internal combustion engine (ICE) vehicles). Autocatalyst demand is rising dramatically, especially as global sales are strongly rebounding from the virus-related shutdowns of the past year, which bodes well for platinum demand going forward.
Highly popular hybrids and fuel cell vehicles also use platinum, and as the growth trend in this segment of the auto industry is dramatically accelerating, it puts yet another demand support underneath the platinum price.
Another reason for owning platinum is the metal’s increasing demand in the jewelry market. Platinum is fast becoming the top engagement ring choice for many couples in North America. What’s more, around 60% of all platinum jewelry is sold in China, with analysts predicting even bigger demand increases in the coming years.
One of the best (and cheapest) ways to own a piece of the lucrative platinum market is through the GraniteShares Platinum Shares ETF (PLTM). The fund is backed by the physical metal and is held in allocated bars (a daily updated bar list is posted at GraniteShares’ website).
What To Do Now
As the momentum behind the bull market in platinum and palladium builds steam on the back of the expanding global economic rebound, I expect this ETF to be one of the top precious metals sector outperformers. Investors can purchase a conservative position in the GraniteShares Platinum Shares ETF here using an initial stop-loss slightly under the 11.50 level. BUY
Copper is on Fire
As the U.S. economy walks along the road to recovery following last year’s Covid-related shutdown, at least one major investment theme has emerged: China is likely to outpace the U.S. in terms of economic performance in the years ahead.
After a rough start last year, China’s economy is now booming after experiencing record growth in the first quarter of 2021, thanks in part to strong exports and rising business confidence supporting the recovery. The consensus among economists is that this year will be another year of impressive growth for China.
One of the most useful indicators for measuring China’s industrial strength is the price of copper. As the world’s second-largest economy and largest industrial nation, China’s appetite for the industrial red metal is voracious.
Copper is used in everything from electronics to smartphones to automobiles, with China accounting for nearly 50% of the world’s demand for the metal. Consequently, its industrial sector is a major driver of copper prices, and when prices are consistently rising it can be assumed that China’s industry is strengthening.
Along with the improving outlook for copper demand from China and other Asian countries, the market’s expectations of lower supplies from top copper miner Chile is another key driver of higher prices.
Since hitting a major low last March, the price of copper is up nearly 120% on high demand and supply concerns and has reached its highest level in over a decade. The consistent upward trend in copper prices in recent months has served as a confirming indicator for China’s equity market, which in turn has important implications for mining stock investors.
Specifically, the companies that mine copper (including those with exposure to China) are likely to benefit from China’s bull market in the coming months and years. Let’s take a look at two such companies that are extremely well positioned for the long-term copper bull market.
Freeport-McMoRan (FCX) is engaged in the exploration and production of copper, gold and other commodities in North and South America, as well as Africa. As one of the world’s top-four copper producers, Freeport stands to benefit from China’s economic rebound in the months ahead.
Freeport is benefiting from some pretty significant tailwinds right now. One of those tailwinds is higher copper prices, which are up nearly 100% since last April. This has provided Freeport with a decisively higher average realized price for the red metal. But the company is also benefiting from gold, with recent sales 9% above the company’s guidance in Q4.
Looking ahead, management projects a copper sales increase of 20% over 2020, with gold volumes expected to rise by more than 50%—even as production remains low (projections which will likely prove conservative). The company’s quarterly dividend has also recently been reinstated, tying a nice bow on an otherwise attractive package.
What To Do Now
Investors can use pullbacks to buy a conservative position in FCX (down to around 38). If you enter, I suggest using a stop-loss slightly under the 35 level initially. BUY ON WEAKNESS
Teck Resources (TECK)
Another potential major copper leader in the coming year is Teck Resources (TECK), which is Canada’s largest diversified resource company with operations and projects in North America, Chile and Peru. Teck is engaged in mining and mineral development, including coal for the steelmaking industry, zinc, energy, and with a major focus on copper.
Teck’s copper business had a strong Q1, with a 205% increase in EBITDA compared to a year ago. The company is in the midst of a strategy aimed at doubling its consolidated copper production by 2023 and boasts one of the very best copper production growth profiles in the industry.
In a high-profile move, Goldman Sachs recently increased its price target for Teck, from 25 Canadian dollars per share ($19.90) to CAD$28 (a 12% increase), which created a flurry of interest in the stock.
But Teck was on the upswing well before this price target increase; indeed, the stock’s strength is more likely the result of its strong copper results and rising red metal prices. Moreover, the firm’s fundamental outlook is strong, with analysts predicting revenue growth of 31% for 2021 and per-share earnings growth of 192%.
What To Do Now
And with the global manufacturing rebound well underway, copper demand will only continue to increase, giving Teck and additional tailwind. Accordingly, investors can purchase some TECK on pullbacks down to around the 23 level. If this trade is initiated, I recommend using a price slightly under 21 (the May 3 pivotal low) as the initial stop-loss. BUY ON WEAKNESS
Steel the Strongest Industrial Metal
Supply shortages, along with a brighter outlook for infrastructure development, is boosting sentiment for steel makers as prices continue to hit new highs.
The key industrial metal, which has also been in short supply ever since the pandemic broke out (due to mill outages, etc.), has been on a rip-and-tear in recent months. Automakers and aerospace parts manufacturers have had to scramble to secure steel supplies, with inventories at their lowest levels since 2004 and hot-rolled steel prices recently hitting highs not seen in decades.
Consequently, analysts see a “super cycle” underway for steel and expect further gains for the metal’s price this year. Further explicating on the steel supply shortages, Credit Suisse analyst Curt Woodworth observed:
“The traditional relief valve of excess China steel production has been turned off owing to ex-China tariffs and more recently China efforts to limit excess production both domestically and in the seaborne market.”
Given the bullish global economic backdrop for these industrial metals, let’s take a look at one particularly enticing opportunity involved with the steel industry.
Cleveland-Cliffs (CLF) is one of North America’s largest integrated steel makers and is well positioned for a global economic recovery. Recently quarterly results provided some insights into why things are rolling for Cleveland-Cliffs.
Credit Suisse Group analysts, moreover, just upgraded Cleveland-Cliffs from neutral to outperform and raised the price target on the stock from $21 to $24. Upgrades from big-name Wall Street institutions often result in short-term demand spikes for stocks, so it wouldn’t be surprising to see investors pile into Cleveland-Cliffs on the back of the news.
Upgrades are ephemeral, however, and not long-term price drivers. To see what’s really keeping the company buoyant, let’s take a look at some recent statistics. To begin with, the firm’s order book remains strong, particularly for consumer goods, while automotive demand has increased as automakers struggle to keep up with resilient consumer demand.
What’s more, the company is selling more steel to select service centers and manufacturing clients outside the auto sector in a move to diversify. Cleveland-Cliff’s recent acquisitions of AK Steel and ArcelorMittal USA is part of this diversification and contributed to the quarter’s eye-popping 323% consolidated revenue increase. The acquisitions also provide a considerable advantage over other domestic producers by making the firm the largest flat-rolled steel producer in North America.
Management just raised fiscal year 2021 adjusted EBITDA guidance to around $4 billion, up $500M from previous guidance, citing better than expected contractual renewals and based on assumptions of high steel prices persisting in the coming months. Analysts are equally sanguine on Cleveland-Cliff’s prospects and are predicting an eye-popping revenue increase of nearly 250% for the current fiscal year.
What To Do Now
Investors who want some exposure to the steel industry can buy a conservative position in CLF around current levels, using a price slightly under the 17 level as the initial stop-loss. BUY