Battery Metals Still in the Lead
Gold and silver are trying to rebound, but sustained U.S. currency weakness is likely needed to give both metals the boost they desperately need.
As for gold, while there still isn’t the intense level of fear needed to sustain a major extended rally right now, the inflation threat is likely the key to the intermediate-term precious metals outlook (as discussed in recent reports).
With the U.S. dollar index hovering just above a critical near-term support level, gold and silver hang in the balance. A weaker dollar would, however, rejuvenate the bulls and likely send prices significantly higher.
The industrial metals outlook is mixed, with steel and iron ore still under pressure, while aluminum is heating up again and copper showing signs of bottoming.
Battery metals, meanwhile, remain strong. Lithium is still the leader while nickel is on the comeback trail, and its recent strength has given us another opportunity in our favorite nickel-tracking ETN.
Feature Story: Not Enough Fear for Gold
In recent issues, we’ve discussed the need for either sustained inflation or sustained worry on the part of market participants to kick off a strong upside move for gold. The lack of either has kept gold range-bound since last August. Last time we focused on inflation, but here we’ll discuss the “fear factor.”
As noted previously, one of the missing ingredients for a sustained yellow metal rally is intense fear—the kind that drives investors to liquidate some of their risk assets and put some of that money into gold as a safety hedge.
While there have been no shortages of fear in recent weeks (Afghanistan, Hurricane Ida, the Delta variant, etc.), none of these fears have been powerful or lasting enough to compel investors to run to the safe havens. Traditional havens like utility and consumer staple stocks have performed moderately well since July, but we’ve seen none of the runaway-type moves in these sectors that would normally accompany massive concern about the economy’s prospects.
Neither have longer-dated Treasury bond prices experienced the type of rallies that are normally seen in periods of heightened worry about the geopolitical or economic outlooks. The iShares 20+ Year Treasury Bond ETF (TLT), for instance, has essentially gone nowhere since peaking in July. If investors truly feared an imminent threat, such as collapsing stock prices or a weakening economy, government bond prices would almost certainly be on the upswing.
By the same token, however, Treasury bond prices are just a little below their 6-month highs, while the defensive Dow Jones Utility Average is within reach of its highest level of the past year. For that matter, the gold price is still about 20% above its March 2020 pandemic panic low and just 8% below its 52-week high. It would seem, then, that investors have been hedging their bets by have at least some exposure to gold and other safe havens.
That said, gold’s failure to rally in the face of increasing worries on the public health and geopolitical fronts continues to perplex participants. In a speech before the nation last week, President Biden announced a Covid vaccine mandate that will impact 100 million Americans (mainly federal employees and contractors, as well as companies with over 100 employees).
The announcement was met with strong reactions among state governors and individuals, some of whom opposed the measures. Given the sweeping nature of the mandate, it would be reasonable to expect that gold prices should have broken out higher in response to the economic uncertainties surrounding proposal. Instead, the gold market barely reacted at all, with December gold futures declining 0.7% the day after his speech.
When we consider the current torpid state of public sentiment, however, gold’s tendency to trade sideways becomes easier to understand.
To help us comprehend why gold’s behavior has been sluggish in the last few weeks, let’s consider the current condition of investor sentiment on Wall Street. According to the latest poll by the American Association of Individual Investors (AAII), just 39% of investors are bullish on the stock market’s intermediate-term outlook, which suggests a measure of caution. Yet only 27% of investors are bearish on stocks, which is below the historical average.
When investors are truly worried that stocks might fall, the percentage of AAII bears tends to rise to around 50% or greater. So there clearly is no pressing motivation right now on Wall Street to sell stocks and rush headlong to the safety of gold.
There have also been increasing concerns about the strength of the U.S. economy going forward. Consider the headline article in the September 8 issue of The Wall Street Journal, “The U.S. Expected an Economic Takeoff. It Got a September Slowdown.” The article went on to explain that Delta variant fears have lately weighed on hiring and consumer spending. Yet even this fear hasn’t been sufficiently strong enough to lift gold out of its sleepy trading range.
All told, it’s obvious that investors simply aren’t completely convinced that a recession, a Covid case spike, a stock market sell-off or any other potentially devastating episodes are imminent threats to the economy right now. And that translates to gold not being in extremely high demand, hence its recent underperformance.
In response to gold’s continued tepid performance, a conservative posture is still warranted with limited exposure to the metal for now.
What to Do Now
Participants recently purchased a half position in the GraniteShares Gold Trust (BAR) after its decisive close above the 50-day trend line. I suggest using an admittedly tight protective stop by choosing a level slightly under 17.75 as stop-loss on this trading position. As I noted previously, BAR should ideally break out decisively above 18.25 in the coming days to confirm that buyers have complete control over the dominant interim trend (thereby establishing a series of higher highs). BAR came perilously close to violating our stop-loss last week, thus a resolution to its recent indecisiveness is likely near. If the ETF falls below last week’s intraday low of 17.70, I’m inclined to exit this position, but for now we’ll stand pat. HOLD
New Recommendations/ Updates
Since establishing a short-term low above $23 in August, silver is trying to establish a more significant intermediate-term low and is within reach of doing so.
As I noted in our last trade alert, the white metal could be on the cusp of another meaningful rally—especially if the market fears that inflation is truly becoming an entrenched reality (as opposed to a temporary phenomenon).
Silver’s latest rally was catalyzed by the market’s realization that the Fed has no intention of shrinking its balance sheet or increasing short-term rates through the end of 2022.
That assurance, combined with the recent passage of a $3.5 trillion U.S. spending blueprint, means that inflation likely won’t be transitory. As such, an increasing number of economists expect inflation to establish a floor above 3%, which is well above the Fed’s 2% target. And that’s potentially good news for silver.
What’s more, the expectation that a $1.2 billion infrastructure spending bill will be passed by month’s end is another key factor supporting silver and other metals prices in the short term.
The fact that silver has largely been ignored in recent weeks after an 18% decline is another reason for the latest strength. Moreover, the metal is likely viewed by value-oriented participants as a bargain at these prices, further increasing its allure and giving it some near-term upside potential.
That said, the one factor needed above all else right now to kick-start a silver rally is sustained weakness in the U.S. dollar. More so than gold, silver’s intermediate-term prospects hinge closely on a weak currency. For that reason, a drop decisively under the 92 level in the U.S. dollar index (USD) would be most welcome from the standpoint of the silver bulls.
As for the white metal, after our favorite silver-tracking ETF closed above the key 25-day moving average recently, the only serious obstacle standing in the way of a major rally is the 50-day line (see chart below). Accordingly, a close decisively above the $22.90 level in SLV would be the first major trend line break for the silver ETF since April and would likely encourage additional short covering in the silver market.
What to Do Now
I previously recommended that speculators purchase a half position in the iShares Silver Trust (SLV). I further recommend using an initial stop-loss slightly under the 21 level (intraday basis) on this trading position. A decisive close above the 50-day moving average is needed to confirm a reversal of the intermediate-term downward trend in SLV. BUY A HALF
Copper Bottoming Despite Supply Concerns
China’s state reserves administration has released 150,000 tons of copper, aluminum and zinc into the market, creating a short-term headwind for the red metal.
The move marks the third round of China’s metal inventory reductions, essentially putting a lid on copper’s latest rally attempt in the second half of August. China’s intervention in the industrial metals market is nominally designed to reduce the pressure of high commodity prices on businesses.
Also putting a damper on the copper market was the revelation that factory activity slowed in August across huge sections of Europe and Asia. Manufacturing in China contracted for the first time in nearly 1 ½ years, causing some observers to worry that industrial demand for copper may be in the early stages of a prolonged decline.
Although supply disruptions in Chile have also been supportive of copper prices in recent months, Chile’s state-owned Codelco (the world’s largest copper producer) has just announced it has reached an early collective bargaining agreement with the unions representing miners at its El Teniente mine. While good news for copper end users, the market’s response to the news is likely another reason to expect more near-term choppiness in the metal’s price.
It should be noted, though, that copper prices are still up 27% year to date (and up 48% from a year ago) on top of a 26% increase last year. Moreover, expectations are high for electrical component use of copper to steadily increase as electrification spreads across the globe.
Then there’s the white-hot alternative vehicle and energy markets. Not long ago, the well-known hedge fund manager David Einhorn of Greenlight Capital made the following observation regarding the metal:
“EVs have [four times] the copper content of [gas-powered] vehicles. Chargers, solar panels, and wind power all require lots of copper, and Goldman predicts 5 [million] tons of demand growth by 2029.”
So, the longer-term demand profile for copper remains bullish despite the short-term supply factors mentioned above.
On the technical front, while the near-term technical outlook for copper is still a bit murky, there are signs that the red metal is bottoming out on an intermediate-term basis after dipping under its 50-day line. Recent developments also suggest we may soon have a new opportunity to nibble in our favorite copper-tracking vehicle, shown below.
But unlike other metals right now, the copper price is struggling to stay above the 50-day line and hasn’t yet established a series of higher peaks to confirm that the short-term trend has turned decisively bullish. I recommend holding off on initiating new long positions for now until the market shows additional improvement.
What to Do Now
We were previously stopped out of our speculative long position in the United States Copper Index Fund (CPER), my preferred copper-tracking vehicle, on August 17 when the 26 level was violated on an intraday basis. We’ll wait for a more propitious entry point before initiating any further traders in this fund. WAIT
Steel Held Back by Iron Ore Decline
Rebar prices have risen 8% since August 20, mainly due to worries over global supplies in the face of China’s production cuts during peak demand season.
The market’s immediate-term outlook was further supported by data from the Mysteel consultancy, which revealed that demand for five major steel products rose for a third consecutive week as of early September.
Nonetheless, steel prices on the Shanghai Futures Exchange haven’t yet fully recovered from last month’s setback when benchmark rebar prices fell 14%. Steel is also still 10% under the May 11 peak.
Moreover, iron ore prices are still in a major slump, which has created a headwind for steel prices. According to Trading Economics, iron ore cargoes with a 63.5% iron content for deliver in Tianjin declined to $145 per ton earlier this month. This price isn’t far from the 9-month low of $139.5, which was last hit in August.
Iron ore is also more than 30% under its record high of $230, thanks in part to China’s steel production curbs in the country’s bid to reduce carbon emissions.
While iron ore prices don’t always lead steel, the typical relationship between the two metals is for iron to be in the front seat. For this reason, there should ideally be a reversal of the downtrend in iron ore before steel is ready to launch its next sustained rally.
What to Do Now
We had a good run in steel and steel products manufacturer Nucor Corp. (NUE), America’s largest and most diverse steel maker. Unfortunately, however, that run has come to an end and I now recommend selling our remaining position in the stock. We initially purchased NUE on August 3 after it reported a 103% year-over-year revenue increase for Q2 while net earnings hit a quarterly record. Shares of the steel and steel products manufacturer were up decisively by August 27, and we took partial profits at that time. We also raised the stop loss to slightly under 110 where it has remained in place ever since. Monday’s downside move in NUE (on no news in particular) violated the 110 stop to take us completely out of the position. I’m sure we’ll get another opportunity to buy into this otherwise attractive company, but given the above-normal volatility in the major steel stocks right now I believe a capital preservation approach is best. SELL
Nickel Bounces Back on Strong EV Demand
As noted last time, nickel futures are back to their highest level since May 2014, having just hit over $20,000 a ton in a powerful resurgence following last month’s pullback.
Supporting the rally in nickel prices are strong battery-related demand from electric vehicle (EV) makers. Additionally, nickel enjoys the support from industrial users amid shrinking supplies, as well as strong demand from stainless steel mills.
Further, sales of EVs are rising worldwide as demand continues to increase on the back of government initiatives to encourage greater EV use and less internal combustion engine (ICE) autos.
According to the latest figures from the European auto industry, the share of electric autos in the first half of 2021 rose near 8% of the new car market in Europe (from 4.3% in 2020). Plug-in hybrids added an additional 8.3% to the total, up from just 3.5% in the year-ago period.
Elsewhere, in China sales of EVs more than doubled in July, including battery-powered electric vehicles, hydrogen fuel-cell autos and plug-in hybrids. China’s move away from ICE vehicles to reduce pollution has prompted domestic EV makers to increase manufacturing capacity in the mainland.
Meanwhile, refined nickel inventories in China’s warehouses recently hit a record low of nearly 4,500 tons in August while stockpiles in LME warehouses have declined to their lowest level since January 2020.
What to Do Now
Last week I put the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN) back on a buy after the recent strengthening in the nickel price. 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. I also suggest using an initial stop-loss slightly under 23.90 (the nearest pivotal low) on an intraday basis for this trading position. BUY A HALF
Aluminum Hits 10-Year High
Aluminum futures rose above $2,900 per ton last week, the highest level since August 2008. The move was catalyzed by a political coup in major producer Guinea, prompting fears that supplies may be threatened in the foreseeable future.
Aluminum prices are up around 50% to date in 2021, thanks partly to increased industrial demand. Prices for the metal have also been buoyed by unprecedented stimulus measures from central banks and governments around the world, as well as supply chain disruptions and transport problems (mainly a lack of containers used to ship the metal from Asia to markets in the U.S. and Europe).
Further, a freak fire at the Jamalco refinery in Jamaica (a joint venture between Noble Group and Clarendon Alumina Production) forced a shutdown. This subsequently pushed alumina prices—a key component for aluminum production—to their highest level in six months.
Yet another fundamental support for the aluminum price is the previously discussed supply reductions in top producer China as part of its effort to reduce carbon emissions and lower commodity prices across the board (which the nation’s monetary authorities deem to be too high).
Recent floods in China have also had an effect in shrinking aluminum supplies, while in number two producer India, a lack of metallurgical coal supplies is threatening domestic production.
But the latest political turmoil in Guinea is arguably the main near-term catalyst for higher aluminum prices, as the country is the second largest producer of bauxite aluminum in the world after Australia. The country also supplies more than half of China’s aluminum imports by China.
Aluminum market experts forecast that Guinea’s mining operations could be down for weeks in the wake of the military disturbance.
What to Do Now
Alcoa (AA) is one of the world’s largest aluminum producers, and as such stands to benefit from the persistent strength in the global aluminum market. Its operations include bauxite mining (aluminum ore), alumina refining (for smelting) and the primary aluminum manufacturing. With aluminum prices at 10-year highs, Alcoa is expected to see significantly higher free cash flows going forward. This is a big reason for the recent strength, especially after a string of high-profile institutions upgraded the company. Another reason for the optimism is the anticipated increase in automotive demand for the metal going forward. On the financial front, revenue was up $685 million, or 32%, from the year-ago period in Q2 on higher aluminum prices. Second quarter earnings per share was $1.63 per share, $0.70 per share higher than the prior quarter, and $2.69 per share higher than the year ago quarter. For Q3, the top line is expected to increase 19% from a year ago and 18% the following quarter. Add to that a possible dividend reinstatement within a year and we like what we see here. Accordingly, I recommended last week buying a half position in AA on pullbacks, using an initial stop-loss placed slightly under the 40 level. BUY A HALF
Battery Demand Still in the Driver’s Seat for Lithium
Lithium carbonate prices remain elevated in the face of the white-hot electric vehicle (EV) market, which shows no sign of cooling anytime soon. Prices for the metal are up nearly 100% since the start of the year.
Further supporting the lithium market is a Bloomberg report which stated that carmaker BMW has increased its orders for batteries cells in a bid to keep up with “accelerating demand” for EVs that accounted for over 11% of its auto deliveries during the first half of 2021.
“The German carmaker now has contracts for more than 20 billion euros ($23.8 billion) worth of batteries, up from 12 billion euros previously,” according to Bloomberg. The cells will be used for BMW i4 sedans, iX sport utility vehicles and other models produced by the company through 2024.
BMW has also announced plans to switch to a new type of EV battery starting in 2025, which could lend further longer-term support to the lithium market.
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 80 (near the 50-day moving average) on a closing basis. HOLD
Rare Earths: Neodymium-Praseodymium in Focus
The global market for rare earth metals is predicted to grow at an annual growth rate of 6% over the next 10 years, according to a Future Market Insight (FMI) study. And despite pandemic-related challenges, the market is also expected to register 3% year-over-year growth this year.
Leading the charge in rare earth metal is demand for neodymium oxide, the strongest permanent magnet material ever discovered and is widely used in the $25 billion global magnet market. It’s also widely used in applications including lasers, microphones and headphones, computer hard disks, electric motors and generators, as well as in the healthcare sector. It’s primarily mined in China, India, the U.S. and Brazil.
Aside from this, the adoption of cerium in catalytic converters of motor vehicles is driving sales of rare earth metals. Additionally, praseodymium use in the production of batteries for electric vehicles is forecast to increase growth in the coming years.
Rare earths like neodymium also play a pivotal role in the booming market for electric vehicles. And with the EV market widely expected to mushroom in the coming years, the companies that mine them will reap substantial benefits along with those who invest in them. (Per the above-mentioned FMI study, neodymium segment is estimated to surpass a valuation of $2.2 billion by 2031.)
Meanwhile in China, the demand for rare earth metals is predicted to exceed a valuation of $161 billion this year. Factors including strong automotive and electronics industry demand, along with widespread and increasing urbanization, will further provide an ideal environment for future growth.
What to Do Now
To gain some exposure to the rare earths sector, I’m adding the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) to our list of holdings. Per the fund’s prospectus, REMX “is intended to track the overall performance of companies involved in producing, refining and recycling of rare earth and strategic metals and minerals,” including tungsten, cobalt, lithium and others mentioned here. I suggest nibbling on weakness and using an initial stop-loss slightly under 100. BUY A HALF
Current Portfolio
| Stock | Price Bought | Date Bought | Price on 9/13/21 | Profit | Rating |
| Alcoa (AA) | 45 | 9/7/21 | 49.5 | 10% | Buy a Half |
| GraniteShares Gold Trust (BAR) | 18 | 8/27/21 | 17.75 | -1% | Hold |
| Global X Lithium & Battery ETF (LIT) | 69 | 6/10/21 | 85 | 23% | Hold |
| iPath Nickel Total Return ETN (JJN) | 26.25 | 9/9/21 | 26.5 | 1% | Buy a Half |
| iShares Silver Trust (SLV) | 22.25 | 9/1/21 | 23 | 3% | Buy a Half |
| Nucor Corp. (NUE) | 104 | 8/3/21 | 110 | 6% | Sell |
| VanEck Rare Earth/Metals ETF (REMX) | 117 | 9/13/21 | 117 | 0% | Buy a Half |
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 October 6, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
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