April 5, 2022

Return of the Gold Standard?
Lost in the shuffle of the steady stream of Russia/Ukraine headlines was a little-reported news item with jaw-dropping implications for precious metal investors. Russia, it seems, is making a serious move toward putting its ruble currency on a gold basis.

On March 25, the Bank of Russia announced it would immediately commence gold purchases from banks, paying a fixed price of 5,000 rubles ($52) per gram. Russia’s central bank had previously suspended gold purchases from banks last month in order to fulfill exploding gold demand from individual buyers. But the central bank’s latest move was based on being able to “ensure sustainable supply and the uninterrupted functioning of gold producers,” according to Reuters.

Because Russian gold is sanctioned by the U.S. and other nations, the price Russians pay for gold internally is far less than the international gold price, hence the steep discount which Russia’s central bank is paying for gold from member banks.

The End Game Investor (EGI) newsletter has observed that Russia’s bank could be building up gold reserves for the purpose of making the ruble a gold substitute at a fixed exchange rate (i.e. a gold standard).

EGI notes that before it can institute a gold standard, it must first ensure it has the required reserves and by also making sure its monetary policy is tight enough (Russia’s benchmark interest rate was recently hiked to 20%, purportedly to bolster the ruble). “Then,” writes EGI, “[Russia’s bank] can insist on payment for Russian commodities in rubles,” which will have become a gold substitute.

Further supporting the narrative of Russia moving toward a de facto gold standard were the latest comments by Pavel Zavalny, head of Russia’s parliament. At a press conference, Zavalny raised some eyebrows among economists when he said, ““The dollar ceases to be a means of payment for us, it has lost all interest for us,” further referring to greenbacks as mere “candy wrappers.”

He went to say that if other countries want to purchase his country’s natural resources (including oil and gas) they may be forced to “pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency.”

Commenting on this shocking (if underreported) statement, MarketWatch writer Brett Arends observed that if Russia’s lead is followed by countries such as China, India and other “countries that may not welcome Washington’s ability to control the global financial system through its monopoly power over the global reserve currency,” it could prove disastrous for the dollar but quite bullish for gold.

Russia’s foray into the gold market isn’t simply a knee-jerk response to Western sanctions. Indeed, the nation’s central bank has been on a veritable gold buying spree since the financial crisis of 2008. After remaining relatively stagnant between 2000 and 2008, Russia’s gold reserves began accelerating higher the year of the credit crash—a trend that has largely continued unabated since then, as the following graph shows.

Adding perspective to the developing trend toward a potential gold standard in Russia (and possibly other countries), Arends noted that gold “is completely private…is completely independent of the SWIFT or any other banking system. And despite the rise of cryptocurrencies, it remains the most widespread and viable global currency that is not controlled by any individual country.”

Indeed, all of the above noted factors are reasons for having some long-term exposure to gold in your investment portfolio. But perhaps the biggest reason of all for owning gold is the apparent move toward eventually reintroducing a gold standard.

Note: In the portfolio, we have one new addition this week.

Updates
Uranium and uranium miners were in the doldrums for several months after prices peaked last fall, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is attracting new interest among investors in the wake of Russia’s invasion of Ukraine, while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—recently provided us with another attractive entry point after correcting almost 40% between November and January. Participants subsequently purchased a conservative position in URA on March 1, using an initial stop-loss slightly under the 20 level. After the 13% rally in URA from our initial entry point, I further recommended locking in 50% profit and raising the stop to slightly under 23 (closing basis) on the remaining position last week. Let’s maintain this protective stop for now. HOLD A HALF

South Africa’s Gold Fields (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of over two million ounces and attributable gold-equivalent mineral reserves of 52 million ounces, providing the firm with plenty of exposure to rising prices. In Q4, Gold Fields increased revenue by 8%, to $1.8 billion, while per-share earnings of 38 cents were in line with expectations. Attributable gold equivalent production for 2021, meanwhile, was 5% higher from a year ago and above guidance, while all-in sustaining costs for mining gold were $1,063 an ounce—well below the current price of around $1,930 an ounce—providing the company with lots of room to expand operations or take on additional projects. Gold Fields said its South Deep mine (one of the world’s largest) was the “stand-out performer” of 2021, with production increasing 29% on lower all-in costs and generating cash levels that were 157% higher than 2020’s, with plans to ramp up production at the mine in the next three years based on its consistent improvement. Looking ahead, management said it expects total production to grow by an additional 20% to 30% over the next three-to-four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Per the rules of my trading discipline, I recently recommended taking 50% profit and raising the stop-loss on the remaining position. Let’s further raise the stop to slightly under 14 (closing basis). HOLD A HALF

With inflation likely to persist, not only industrial metals but commodities in general should outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e. fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason, I expect DBC—which is heavily skewed toward the energy sector—to continue to outperform. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. After the 21% rally since our initial entry, I previously suggested taking 50% profit in this position. I also suggest raising the stop at slightly under 25 (closing basis) on the remaining position. HOLD A HALF

Natural Resource Partners (NRP) is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including coal and other natural resources (mainly gas and timber). Approximately 65% of the firm’s coal royalty revenues and around 45% of coal royalty sales volumes were derived from metallurgical coal in the latest quarter, making the stock a good proxy for steel demand. The company released fourth-quarter earnings results last week that boasted revenue of $84 million, a 114% increase from a year ago, along with per-share earnings of $2.42. The company stated, “Strong demand for metallurgical coal, thermal coal and soda ash in the fourth quarter produced one of the best quarters in terms of free cash flow generation in the Partnership’s history.” Management was sanguine about the year-ahead outlook, with plans to generate even more “robust” free cash flow in the coming months while paying down debt and solidifying its capital structure. The company also recently declared a 45-cent per share quarterly dividend (4.7% yield). Participants recently purchased a conservative position in NRP, and after a 10% rally, I recommended selling a half and raising the stop on the remaining position to slightly under 34.50. I now suggest raising the stop a bit higher to slightly under 40 (closing basis) where the 25-day line comes into play. HOLD A HALF

Peabody Energy (BTU) is the world’s largest private sector coal company, engaged in the mining and distribution of steelmaking and thermal coal. The company has lately benefited from significant price increases for seaborne metallurgical (met) coal used for making steel. The company has made it clear that it expects the steelmaking coal segment to lead the way in 2022. In Q4, Peabody reported revenue of $1.3 billion which was 71% higher from a year ago, driven by higher coal prices and sales volumes. Per-share earnings of $3.90, meanwhile, beat estimates by $2.79. Also during the quarter, the company generated $427 million in free cash flow (about one-fourth of its current market cap) and retired $200 million of secured notes as it continues to pare debt. Management further guided for the strong conditions in the coal market to persist, while expecting that export volumes of met coal will increase “substantially” due to recent mine expansions. Participants on March 22 bought a conservative position in BTU using a level slightly under 19.75 as the initial stop-loss (closing basis). After the 19% rally from our initial entry point, we sold half the position on March 29 and raised the stop on the remaining position to slightly under our initial entry point of 21.90 (closing basis). HOLD A HALF

Reliance Steel & Aluminum (RS) is the largest metals service center operator in North America, providing metals processing, inventory management and delivery services for several industries, including construction, energy, electronics, automotive and aerospace. With metals demand and pricing buoyant in each of these key industries, Reliance finished 2021 on a high note, setting records in a number of key metrics despite supply-chain disruptions and labor market tightness. The company also returned over $500 million to shareholders through dividends and buybacks, with $713 million remaining on a $1 billion share repurchase authorization. Further out, management said it was optimistic about business conditions across its end markets and estimates a 6% increase in tons sold for Q1 compared to the year ago. Reliance also guided for Q1 per-share earnings to range between $7.05 and $7.15 (up 4% sequentially at the midpoint and in line with estimates). In view of the relative strength in this dual steel/aluminum company, traders recently purchased a conservative long position in RS. I suggest using a level slightly under 180 as the stop-loss on a closing basis. HOLD

Sigma Lithium (SGML) is a Canadian company that develops, through its subsidiary Sigma Mineraao S.A., hard rock lithium deposits in the Americas. Sigma’s properties are located in Brazil’s Minas Gerais State in the municipalities of Aracuai and Itinga, and the company holds nearly 30 mineral rights in four properties spread over 120 miles, including nine past-producing lithium mines. The firm is focus on producing battery-grade lithium concentrate from its Grota do Cirilo property—the largest lithium hard rock deposit in the Americas—to support the booming electric vehicle (EV) industry. Analysts expect Sigma will begin generating revenue by the end of 2022 as its lithium production commences at half scale, bringing the company one step closer to its goal of being the world’s largest low-cost lithium producer. Additionally, Bank of America recently picked Sigma as one of its top “scarcity plays” in the face of a tight supply backdrop in the global lithium battery space. Participants on March 22 bought a conservative position in SGML using an initial stop-loss slightly under 10.50 (closing basis). Last month, I suggested taking 50% profit in this stock after it rallied 14% from our initial entry point. I also recommend raising the stop-loss in the remaining position to slightly under 13 (closing basis). HOLD A HALF

In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), we added Teck Resources (TECK) on February 8. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. Teck also raised its annual base dividend to 50 cents per share (from 20 cents), and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit top line and triple-digit bottom line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons, (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I previously suggested booking 50% profit. I also recommend raising the stop-loss on the remainder of this trading position to slightly under 37.10 on a closing basis. HOLD A HALF

New Positions
Nucor (NUE) is a leading steel company with a massive market share in North American structural, cold finish and bar steels. Nucor has managed to maintain consistent profit growth for many years, even in periods when other steelmakers have struggled. A key to Nucor’s success has been in its steady intensive capital investments, allowing it to achieve increasing efficiencies (the latest being a $290 million modernization of its Indiana sheet mill). The firm’s investments paid off handsomely in 2021, which was a record-setting year for the firm. Nucor posted full-year sales of $36 billion, up 81% from the prior year, based on higher tons sold and higher selling prices (up 64% from 2020). Fourth-quarter revenue was $10.3 billion (its fourth consecutive quarterly record), up a mouth-watering 97%, while per-share earnings of $7.97 beat estimates 13 cents. Nucor also operated its mills at 94% of capacity for the year, versus 82% in 2020, a testament to the strong demand for its steel. Management said it was “overwhelmingly positive” for 2022 based on pent-up demand, predicting the end use market would remain strong for steel and steel products and expecting another year of “strong profitability.” Shareholder returns remain another focus going forward (returns averaged 55% of net income last year), and Nucor just hiked its quarterly dividend by a healthy 24% (1.3% yield) with plans to repurchase additional shares in 2022. For Q1, analysts see sales and per-share earnings jumping 50% and 132%, respectively. Participants can buy a conservative position in NUE using a level slightly under 134 as the initial stop-loss on a closing basis. BUY A HALF

Portfolio

Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.