August 17, 2021
The late, great market timer Joe Granville was famous for saying that “the obvious is obviously wrong.” In the wake of gold’s recent plunge, many participants wondered if perhaps that might be the case for the widely held belief that the Delta strain of the coronavirus will lead to economy-slowing restrictions this fall.
Gold: Is the Delta Narrative Collapsing? The late, great market timer Joe Granville was famous for saying that “the obvious is obviously wrong.” In the wake of gold’s recent plunge, many participants wondered if perhaps that might be the case for the widely held belief that the Delta strain of the coronavirus will lead to economy-slowing restrictions this fall. The gold price, after all, was clearly buoyed by the rising coronavirus case count that began in early July. As previously noted here, gold’s price rose synchronously with the virus case rate for much of July before collapsing earlier this month. The headline reason for gold’s “flash crash”—its biggest two-day drop since the March 2020 crash—was the better-than-expected U.S. payrolls report for July released on August 6. This triggered a massive $4 billion sell order for gold (around 24,000 futures contracts) on fears that the Fed would begin tapering asset purchases sooner than expected. But there were clearly other factors at play behind the sell-off, especially given that gold had ignored some prior employment reports and tapering threats. One theory behind gold’s recent “flash crash” is that, despite the initial fear surrounding the increasing case rate for the Delta variant of the coronavirus, restrictions by some big companies regarding vaccination requirements were recently dropped. This in turn caused investors to reevaluate the “fear trade” in gold and led to a willingness to embrace more risk via the equity market (while moving away from safety-oriented gold and Treasury bonds). Specifically, the news that three major airlines (Delta, Southwest and American Airlines) wouldn’t require their employees to take the Covid shot provided some relief to investors who were worried about possible “vaccine passports” and their potential to restrict economic activity. Thus, advanced knowledge of the airlines’ latest policy decision may have encouraged some “sell the rumor” liquidation among large traders. Then there were news accounts suggesting the White House has lately backed off proposing stricter travel restrictions and vaccine mandates because of “political sensitivities.” In the words of an Associated Press report, the Biden administration is worried that such mandates “would be too polarizing for the moment.” Nevertheless, gold didn’t stay down for long after falling $100 an ounce earlier last week. It has since gone on to recover most of its flash crash losses in the last few days, with the yellow metal perched at $1,780 as of this writing. A likely reason for gold’s quick rebound was last week’s sudden drop in the preliminary University of Michigan Consumer Sentiment Survey for August. The survey surprised economists and investors alike by plunging 11 points to 70.2. The survey hit its lowest level in 10 years due to “weakening sentiment about all aspects of the economy,” according to Briefing.com. Briefing.com went on to observe that “the plunge in consumer sentiment wasn’t just related to concerns about the Delta variant. It was linked to all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment” (the kind of news gold likes to hear). What’s more, the consumer pessimism was categorically visible across age, income and education brackets and was observed across all regions. Another catalyst for the metal’s sharp rebound is the fact that virus cases continue to spike and show no sign of abating, as reflected in the following graph. This suggests that even as Covid-related restrictions aren’t yet increasing appreciably, they’ll likely do so as we head closer to the upcoming cold and flu season. The answer, then, to the question posed in the above headline is an emphatic “no!” Despite the recent relaxation in certain Covid-related restrictions this summer, the worrisome Delta narrative is still strong, persistent and not likely to disappear anytime soon. And while Delta will create its own set of challenges for the economy, it should also help boost gold’s safe-haven appeal in the months ahead. What to Do Now We recently sold our small position in the GraniteShares Gold Trust (BAR) after it violated our stop-loss at the 17.66 level. No new trading positions in BAR are recommended at this time as we await a more favorable entry point. BAR remains under both the 25-day and 50-day trend lines and hasn’t confirmed last week’s bottom yet. However, based on the rapid recovery in gold prices, we may have a renewed entry point within the next few days. Stay tuned. Updates 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 77.14 (halfway between where the 25-day and 50-day moving average come into play). HOLD We recently added the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN) to our portfolio as a recommended buy. JJN was up around 10% by the end of July in the wake of the Tesla supply deal announcement, at which time I recommended booking a partial profit in this stock (per the rules of our trading discipline). I also suggested raising the stop to slightly under 24.50 (halfway between the 25-day and 50-day moving averages) on an intraday basis on the remainder of this trading position. This protective stop was triggered on August 9, effectively knocking us out of the remainder of our trading position in JJN. No new trades are currently recommended in the ETF for now. SOLD After the recent strength in steel prices, I placed steel and steel products manufacturer Nucor Corp. (NUE) on a buy earlier this month. Traders accordingly purchased a conservative position in NUE using the 96 level as the initial stop-loss on an intraday basis. NUE closed decisively above its 50-day moving average in late July after recently reporting a 103% year-over-year revenue increase, to nearly $9 billion, for Q2 while net earnings hit a quarterly record of $1.5 billion (versus $109 million in the year-ago quarter). Shares of the steel and steel products manufacturer were up nearly 20% as of August 13, and our position now shows a gain of 21% in just over a week. Accordingly, I suggested last week taking partial profits and raising the stop-loss on the remainder of the trading position to slightly under 104 (our initial entry point) on an intraday basis. I now suggest raising the stop to slightly under 110 after Nucor’s additional strength since then. On the company front, the top brass said it expects increased profitability across the steel mills segment going forward, and analysts anticipate 97% sales growth for Q3. HOLD I previously recommended that lithium investors with a speculative bent 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 it 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 were instructed to 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. After the 50% rally in SGMLF since our initial purchase, I suggested taking some profit and raising the stop-loss to slightly under 6.00 on an intraday basis for the remainder of the trading position. I now recommend further raising the stop to slightly under 6.50. For the TSX symbol, I recommend raising the stop-loss to slightly under 8.00. HOLD After the recent strength in the physical market, I placed 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 purchased a conservative position in CPER after the recent pullback. I suggest using an initial stop-loss on this trading position slightly under the 26 level (intraday basis). HOLD We exited our trading position in Wheaton Precious Metals (WPM) on August 10 when our stop-loss at 42.50 was violated. Wheaton’s second-quarter earnings (released last week) were a mixed bag, featuring both a 33% year-over-year revenue increase and an EPS miss. Gold production increased 32% while silver output rose 84% in Q2. Moreover, the average realized gold equivalent price rose 24% in the quarter. Really, there was more to like than dislike in the report, and the company’s fundamental backdrop is still quite attractive. But until the chart improves—and more importantly, until silver prices decisively firm up—I’m going to hold off on making any new recommendations in WPM. SOLD New Recommendations The SPDR S&P Metals & Mining ETF (XME) provides an ideal vehicle for investors who wish to have broad exposure to all major areas of the industrial minerals and precious metals mining sector. In the words of the fund prospectus, “Seeks to provide exposure to the metals & mining segment of the S&P TMI, which comprises the following sub-industries: Aluminum, Coal & Consumable Fuels, Copper, Diversified Metals & Mining, Gold, Precious Metals & Minerals, Silver, and Steel.” Given the ongoing improvement in industrial metals (particularly steel and aluminum), I’m placing XME on a buy. I suggest using near-term pullbacks to initiate a conservative long position in XME. I further recommend using a level slightly under the 42.60 level (intraday) as the initial stop-loss on this position. BUY A HALF Portfolio
|Price on 8/17/21
|Global X Lithium & Battery ETF (LIT)
|iPath Bloomberg Nickel Subindex ETN
|Nucor Corp. (NUE)
|Sigma Lithium Resources (SGMLF)
|S&P Metals & Mining ETF (XME)
|Buy a Half
|United States Copper Fund (CPER)
|Wheaton Precious Metals (WPM)
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%. 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).