A Mixed Metals Market
Gold and silver are still trying to rebound after recent shows of weakness, held back by persistent strength in the U.S. dollar and a recent rise in short-term interest rates.
Silver premiums are well above normal, but this hasn’t materially impacted prices, yet—likely because foreign “hot money” inflows into U.S. risk assets are stealing the metal’s thunder for now.
The industrial metals outlook also remains mixed, with iron ore still under pressure, while aluminum is strengthening along with the battery metals nickel and lithium.
The feature metal this week is tin, whose recent strength has given us another opportunity in our favorite tin-tracking ETN.
Feature Story: A Bifurcated Metals Market
To say that this summer was a volatile season for metals markets would be a huge understatement.
For the last three months, most precious metals have shown abnormal (and frustrating) levels of weakness despite inflationary pressures. By contrast, base metals and rare earths—particularly those used heavily in cleantech applications—have experienced varying degrees of strength.
As I’ll argue here, this split market environment is likely to persist into the fall months, as global currency and equity market crosscurrents and rising interest rates put downward pressure on precious metals while generally benefiting select industrial metals.
Let’s start with gold, which has unquestionably been the most baffling metal to forecast in recent months. Under “normal” circumstances, gold should be in full-on bull market mode given this summer’s low-rate environment, Covid-related worries and rising inflation rate. Yet gold managed to only break even during the three summer months, entering autumn last week at almost exactly the same level it entered summer this past June—around the $1,775 per ounce level.
Granted, a breakeven performance is preferable to a loss, but given the outsized gains seen in other metals in this same period (e.g. nickel and tin were both up around 25%, while aluminum rose 30% and lithium gained an astounding 80%), it comes as a disappointment.
Meanwhile, gold’s sister metal silver was a notable laggard, shedding 15% during the June-September quarter. The other major white metals, platinum and palladium, were down 14% and 27%, respectively.
One of the key reasons for the weak showing in the precious metals is that the U.S. dollar index (USD) has been fairly strong in recent months—especially compared to the drubbing USD took last year. But it isn’t so much the strengthening greenback that has pushed precious metals prices lower as the fact that the stronger dollar reflects a preference for U.S. risk assets like stocks versus safe-haven assets like gold.
Concerns over China’s real estate market, plus relative strength in the U.S. equity market compared with other major regions like Europe and Asia, have resulted in an outflow of money from other countries and into the U.S.
An illustration of Wall Street’s outperformance vis-à-vis the rest of the world is shown in the graph of the Vanguard All-World ex-U.S. ETF (VEU) versus the S&P 500 Index (SPX). As you can see, global equities in general haven’t kept pace with the stronger performance of the SPX on a 6-month basis.
Moreover, the U.S. economy is recovering at a stronger and faster rate than that of other major countries, which serves as a further attraction for investors. Additionally, Covid-related restrictions in the U.S. are far less severe right now than they are in several major foreign nations.
And after playing defense for most of the last year, investors in the aggregate are hungrily seeking higher capital returns and are willing to take more risks. The domestic real estate market is also a hot attraction right now and travel restrictions in the U.S. are loosening up (the White House just announced it will allow international travel to the U.S. pending Covid vaccination proof). Consequently, many real estate experts are predicting more foreign capital will flow into U.S. real estate—a trend that may be further expedited by China’s Evergrande crisis.
With risk appetites on the rise, the U.S. will likely be a prime destination for “hot money” inflows at the expense of gold, silver and other safety assets. Gold has undoubtedly factored in these anticipated developments, which would explain its torpid performance lately.
A final consideration for gold is the lack of intensive fear, which is normally needed to propel bullion prices significantly higher. That fear isn’t exactly heavy in the air right now can be seen in the following graph, which shows the ICE BofA U.S. High Yield Index Option-Adjusted Spread. Whenever this credit spread indicator spikes significantly higher, it reflects serious concerns about the stability of the debt market (where trouble tends to be most acutely felt in times of uncertainty).
Historically, each time in the last decade this indicator has rallied by at least 40%, gold prices have always followed suit by launching a sustained rally—usually lasting several months.
We’re not there yet. Gold prices are subdued, and the credit indicator shows that the market isn’t very worried about a “black swan” event right now. But with so many landmines abounding on the financial, economic and geopolitical fronts, it’s likely just a matter of time before one occurs. And when it does, gold will almost certainly be the asset of choice for riding out the storm.
In the meantime, the relative strength of the battery metals, rare earths and select industrial metals like aluminum should provide plenty of opportunities to profit while the precious metals remain under pressure. Driving this trend to a large extent is the clean energy/decarbonization trend, which is in full swing right now (as we’ll discuss later in this report).
All told, investors should expect to see a continuation of the bifurcated market environment with precious metals underperforming, while so-called “green” industrial metals outperform in the coming months.
What to Do Now
We were stopped out of a speculative long position in the GraniteShares Gold Trust (BAR) on September 16 after its decisive intraday move under the 17.70 level. As mentioned in last week’s trade alert, we’ll wait for the precious metals broad market to bottom out and (ideally) for the dollar index to weaken before making any additional trades in BAR. SOLD
New Recommendations/ Updates: Iron Ore Still Under Pressure
Silver Stackers Revisited
A few months ago, we looked at the so-called “silver stackers,” a term coined by the financial media to describe small investors who buy (and hoard) silver bullion coins.
This group originated with a Reddit community called Wall Street Silver (with its members calling themselves “stackers.”) Many within this community believe that by purchasing as many bars and coins as they can, they can collectively run up silver prices by 100% or even 1,000%.
In May I wrote, “How much of an impact these Reddit community members have had on the 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.”
Since then, silver prices have fallen 21% from a peak of around $28 an ounce to a recent low of $22. Obviously, then, the stackers had no impact on price and never saw the short-covering event they hoped to create. But to assume they have had no impact at all on the physical supply of silver is clearly wrong.
As it turns out, silver premiums are well above average—in no small part due to physical buying. A fair premium for silver bars is around 5% to 8%, while silver bullion coins normally sell 12% to 20% above spot. Privately minted silver coins (i.e., “rounds”) are usually somewhere in between the premiums on bars and bullion coins. But current bullion coin premiums over spot are around 30%, reflecting an above-normal demand for physical silver versus electronic silver (via ETFs and futures contracts).
I was recently asked, “Can you remember a time when silver premiums were this high without it having a material impact on prices?” My short answer was “no.” And the best explanation I can offer for the market’s failure to respond to the strong demand for physical product is that silver is still, at its core, a safe haven asset. As discussed previously in this report, the level of fear among investors needed to propel safety-oriented gold and silver higher isn’t there yet.
I further maintain that gold will likely lead silver prices higher when the next rally phase begins. Ideally, silver should lead gold at key turning points. But when silver is drastically underperforming gold—as it has been recently—the yellow metal normally ends up pulling silver higher at some point. (A persistent decline in silver prices often leaves investors feeling too tepid to touch it, so they look for clues from its sister metal gold before jumping in as buyers.)
That said, silver’s longer-term fundamentals are encouraging. The Silver Institute is forecasting silver demanded for 5G applications to more than double, from the current 7.5 million ounces to around 16 million ounces by 2025, and as much as 23 million ounces by 2030. If realized, the latter projections would represent a 200% increase from current prices.
Moreover, around 60% of silver is used for industrial applications, such as solar panels and electronics, with renewable energy encompassing a growing share of silver’s use. As analyst Richard Mills recently noted, “More and more silver is being demanded for use in solar photovoltaic (PV) cells, as countries move towards adopting renewable energy sources.”
In the short term, however, the wait continues for silver prices to bottom out and confirm the bear market is over.
What to Do Now
We were stopped out of our speculative half position in the iShares Silver Trust (SLV) on September 17 when our stop-loss slightly under the 21 level (intraday basis) was violated. I noted previously that a decisive close above the 50-day moving average is needed to confirm a reversal of the intermediate-term downward trend in SLV, an observation that I reiterate here. SOLD
Copper Outlook Mixed as China Weighs
In the early part of this year, copper exhibited persistent strength in rising from a January low of $3.50 per pound to $4.75 by May. The strength was driven primarily by economic reopening hopes, the white-hot automotive industry and alternative energy demand.
The latter application even gave rise to copper being called the “king of the green metals” by some observers. But after the May peak, copper prices have since declined by as much as 15%, hitting a low of $4.03 last month.
The weakness of the last few months has been driven partly by global growth concerns, but also by China’s release of the metal from its reserves. (China’s state reserves administration previously dumped 150,000 tons of copper, aluminum and zinc into the market, creating a short-term headwind for the red metal.)
Those headwinds haven’t completely dissipated, as China has recently emphasized its plans to release even more industrial metals like copper from its reserves. Meanwhile, investors are worried after Evergrande, China’s second-largest property developer, defaulted on a dollar-denominated bond. The worry here is that consequent economic weakness in China, the world’s largest copper consumer, will weigh heavily on copper prices (which tend to track China’s industrial strength).
Not all the news is bleak, however. Chile, the world’s biggest copper producer, gave the red metal market a reason to hope for near-term strength. Chile’s copper commission, Cochilco, forecasts a copper deficit of 153,000 tons for the full year (while expecting a surplus of 190,000 tons next year).
Goldman Sachs, meanwhile, predicts that by 2030 copper demand will increase 600%, to 5.4 million tons, on the back of growing renewable energy technology demand. U.K.-based Henyep Capital Markets echoes this sentiment for copper’s intermediate-term outlook, due mainly to electric vehicle demand.
On the technical front, I’m echoing the sentiments I expressed in the last report. I noted that while the near-term technical outlook for copper is still 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 further 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 still 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. For that reason, I recommend holding off on initiating new long positions until the market shows additional technical 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 Market Wracked by Crosscurrents
The steel market has been a mixed bag lately, with physical prices near record highs while the stock prices of publicly traded steel producers have been under selling pressure.
Steel rebar prices are just slightly under their May peak, while Shanghai steel futures continue to trade around CNY 5,800 a ton in—close to a record of CNY 6,200 hit earlier this year.
According to Trading Economics, “Environmental curbs in China’s Jiangsu and Zhejiang provinces hit steel mills, with production falling in September and August as the top producer is attempting to reach carbon neutrality by 2060.”
A revival in demand for autos, cans, appliances and appliance fittings has provided a boost for prices. By the same token, however, the Evergrande debt crisis has increased fears about a demand drop from the real estate sector, which accounts for over one-third of China’s steel consumption.
This begs the question as to which side of the market we should believe. Are steel rebar prices near record highs forecasting even more strength ahead for the steel market? Or is the 25% drop in the share prices of major producers like U.S. Steel (X) telling us the steel market is in for a rude awakening in the intermediate term?
I tend to follow the lead of the equity markets, since significant declines in stock prices suggest that forward-looking investors and insiders are pricing in choppy conditions in the foreseeable future.
What’s more, feedstock iron ore prices are still in a major slump, which suggests investors are worried about China’s steel production curbs (as part of its bid to reduce carbon emissions), as well as the potential for declining industrial demand from China.
Industry experts also believe there’s room for iron ore prices to weaken further as consumer preferences are putatively shifting away from goods and increasingly toward services.
EV Demand in Driver’s Seat for Nickel
Nickel futures recently declined to below $19,000 a ton after hitting a 7-year high of $20,400 earlier in the month.
Driving the 7% decline was the market’s reaction to the Evergrande debt crisis, which understandably caused investors to worry about a potential demand slump (the Chinese property sector reportedly accounts for around 10% of global nickel demand).
Nevertheless, demand from stainless steel mills and electric vehicle (EV) battery makers remains strong. And nickel inventories are still diminishing, thanks in part to China. 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.
Since last week, however, nickel prices have begun to climb back from the recent low of $18,750. Among other factors, driving the rebound was a report published by The Economic Times of India, which forecast that India’s EV demand for commercial use is likely to increase by 15 times in the next six months.
The projected increase is expected to be “driven by the rise in fuel prices, incentives rolled out by the central and state governments and renewed emphasis by e-commerce companies to electrify their last-mile delivery fleets,” according to the Times.
What to Do Now
Earlier this month 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 Fundamentals Still Strong
Not surprisingly, rising aluminum prices have encouraged producers with shuttered facilities to reopen them.
An example of this is found in Alcoa’s 60% ownership stake of Brazil’s Alumar aluminum smelter. After six years of lying dormant, the smelter is on the verge of resuming operations.
Alcoa plans to reopen its 268,000-ton-per-year stake, with the first metal due in the second quarter of 2022, with full capacity scheduled for next year’s Q4.
While the resumption of idled operations will bring more supply to the market and eventually bring down prices, it’s not yet a factor as global supplies of the metal remain tight.
Based on data from the International Aluminum Institute (IAI), China’s aluminum production rate slowed markedly last month. Meanwhile, China’s annualized run-rate fell nearly 39 million tons in August—its lowest level in nearly a year, according to Reuters.
Demand in top consumer China for aluminum remains high, by contrast, even as pressures remain a pressing problem due to global supply-chain disruptions.
Reuters further notes that China’s smelters are being affected by “both a temporary power crunch and structural energy restrictions linked to Beijing’s decarbonization goals.” Consequently, there have been capacity cuts of 2.3 million tons per year, with cutbacks expected to last until at least the end of this year.
Finally, the global aluminum supply is still being impacted by the previously discussed military coup in Guinea, the second-largest producer of bauxite and China’s largest supplier. Echoing these concerns, BMO analyst Colin Hamilton observed: “The aluminum market remains tight, with metal availability scarce on the back of Chinese production cuts, port delays and shipping issues.”
Based on the fundamental weight of evidence, the record run higher in aluminum prices in recent months is still supported, which bodes well for producers.
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. On September 7, I recommended using pullbacks to buy a half position in AA, using an initial stop-loss placed slightly under the 40 level. BUY A HALF
Lithium Strength Persists Despite ETF Dip
Lithium Carbonate prices soared above 153,000 yuan per ton in September, reaching their highest levels in nearly three and a half years.
Year to date, lithium prices are up 220% as EV battery demand has persistently increased while supply worries linger. The governments of several major countries, led by the U.S., are making huge bets on the future of electric vehicles, which has caused the lithium market to boom.
Worldwide EV sales, meanwhile, rose 150% in the year to date as of July (the latest date for which statistics are available). The number of EVs sold rose to over 3 million units, with over a third of those sold in China, according to consultancy Rho Motion.
On the demand front, lithium consumption is expected to increase 26% to 450,000 tons this year, according to a Benchmark Mineral Intelligence report. If realized, this would put the market into a deficit of 10,000 tons.
Despite the recent highs in lithium carbonate prices, our favorite lithium tracking vehicle (see below) hasn’t reflected this latest show of physical market strength. Accordingly, we recently exited our profitable position in this ETF after our stop-loss was triggered. We’ll look for a better re-entry point once the lithium market cools off a bit.
What to Do Now
In June, I recommended that traders buy a conservative position in the Global X Lithium & Battery Tech ETF (LIT) on weakness. We later booked some profit in this trading position after it first rallied 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. Last week’s dip triggered this stop-loss, meaning we’re now out of LIT for now. SOLD
China to Form Rare Earths “Super Group”
China Minerals Rare Earth Co Ltd. said last week that its parent, China Minerals Corp., along with Aluminum Corp. of China and the government of Ganzhou, East China’s Jiangxi Province, are planning a “strategic restructuring of rare earth assets.”
The three parties own mining output quotas in the medium-heavy rare-earth sector of around 10,000 tons, accounting for 86 percent of the first batch of quotas set for 2021. “This means that their restructuring will establish a super group focused on medium-heavy rare-earth products,” according to the Global Times.
China accounts for 58 percent of rare-earth production globally, which is down from around 90 percent in 2016, according to U.S. Geological Survey data. Increased production in the U.S. and Australia in recent years has eroded China’s market dominance.
Bloomberg says the combination is designed to increase pricing power while also concentrating on industry development and improving China’s competitive edge in the rare earths market.
What to Do Now
To gain some exposure to the rare earths sector, I added the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) to our list of holdings on September 14. 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
Tin Resumes Historic Bull Market
Tin’s historic run to all-time highs continued last week, as the price hit $36,700 per ton. Rapidly diminishing inventories and relentless demand from electronics producers are the primary catalysts behind tin’s strength.
According to reports, tin inventories in LME warehouses are down 79% from a year ago as of last week. In China, Shanghai Futures tin stockpiles were reported at 1,700 tons by Reuters last week, a level not seen in over five years.
Further adding to the bullish supply picture, the worldwide deficit in the white metal is predicted to increase to 12,700 tons by next year—up 25% from 2021 levels, per the International Tin Association (ITA).
Elsewhere, top-five tin producer Bolivia’s production this year will reach 20,000 fine metric tons (FMT), with a goal of doubling that figure next year, according to Reuters.
Eugenio Mendoza, president of the official Bolivian Mining Corporation (Comibol) told Reuters that in 2021, Bolivia will “easily” reach $400 million in tin exports. He added that plans are to double production once prices drop.
What to Do Now
I’m placing the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy after the recent strengthening in the tin price after a correction in August. I suggest waiting for a pullback before entering given the vertical nature of the latest run-up. 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 tin-tracking vehicle. I also suggest using an initial stop-loss slightly under the 100 level (the current location of the 50-day moving average) on an intraday basis for this trading position. BUY A HALF
Current Portfolio
| Stock | Price Bought | Date Bought | Price 9/28/21 | Profit | Rating |
| Alcoa (AA) | 45 | 9/7/21 | 50 | 12% | Buy A Half |
| Global X Lithium & Battery ETF (LIT) | - | - | - | - | Sold |
| iPath Nickel Total Return ETN (JJN) | 26 | 9/9/21 | 24 | -7% | Buy a Half |
| iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) | New Buy | - | - | - | Buy a Half |
| iShares Silver Trust (SLV) | - | - | - | - | Sold |
| VanEck Rare Earth/Metals ETF (REMX) | 117 | 9/13/21 | 103 | -12% | 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 12, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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