Gold’s ‘Fear’ Factor Returns with a Vengeance As we discussed in the last issue, inflation has made an emphatic arrival and is being felt throughout the economy, both domestically and globally. This has important implications for metals investors, particularly in the base and industrial segments of the metals and mining industry. The signs of inflation’s unwelcome return can be seen in an ever-expanding number of headlines. Last week, the U.S. Consumer Price Index (CPI) for April rose almost 1% from March and was considerably above consensus expectations of a 0.2% increase. Meanwhile, core CPI, which excludes food and energy, also increased nearly 1% in April and above consensus. The big takeaway from this reading is that on a year-over-year basis, total CPI was an eye-popping 4.2% higher and running at an annualized pace of 5%— the highest rate since 2008! That year was significant and instructive, for it was the last time the global economy experienced massive commodity price inflation (particularly crude oil prices). Moreover, metals prices in the war-inspired inflationary years of 2003-2008 were lofty, with several base and precious metals hitting record (or near-record) highs. The difference between then and now is that in 2008, the crude oil price reached a record high of nearly $150/barrel before collapsing. This time around, oil prices are far below that number, yet there’s plenty of broad-based inflation worries to keep traders on edge—a reason for expecting the broad metals sector bull market to persist. What’s also worth mentioning is that China’s Producer Price Index (PPI) for April showed an inflation rate that greatly surprised the market to the upside and reached nearly 7% year over year—the highest rate since 2017. This in turn sent analysts scurrying to explain the heated conditions in China and sparked fears that inflation in manufacturing-heavy China would ripple even further across the global economy. 
Surprisingly, the cryptocurrency market has entered the narrative for inflation-sensitive assets in a big way. Last week, Tesla CEO Elon Musk made waves when he tweeted that bitcoin would no longer be accepted as payment for his company’s electric vehicles due to environmental concerns. The cryptocurrency market subsequently lost more than $365 billion. Moreover, according to Bitcoin.com, “The entire crypto-economy has dropped more than 6% and bitcoin dominance is down to 40%, the lowest the metric has been in two years.” You might ask: What connection could bitcoin possibly have with the metals market? Quite a bit, as it turns out. For much of the past year, observers have debated the effect that bitcoin and other cryptos were having on gold’s safe-haven demand. A case was advanced that bitcoin was the “safe haven asset of choice” among those of the millennial generation (due to that generation’s preference for intangible assets). As a corollary to this, it was further stated that the growth of the crypto market would necessarily undermine the investment demand for gold and other precious metals for years to come. But betting against gold’s long-term record of being the premier haven of choice among safety conscious investors is a fool’s errand, as subsequent events have proved. The recent weakness in the bitcoin market bears witness to that, as one leading bitcoin tracking vehicle, the Grayscale Bitcoin Trust (GBTC), has lost 36% since peaking in late February. By contrast, the gold price has gained almost 12% from its March lows and is likely headed higher over the intermediate term. And there’s plenty of anecdotal evidence to suggest that some of those gains came from cryptocurrency market outflows, as many bitcoin sellers have reportedly entered the gold and silver market. 
Moreover, bitcoin’s biggest gains of the last year occurred during the August 2020-February 2021 period—a phase which saw crypto prices soar on speculative demand. During that same time, gold prices were in steady decline as safety demand was diminishing. Now, however, those roles have reversed. It’s clear, then, from the past year’s record that bitcoin has served as more of a speculative medium than a safe haven, while gold has maintained its long-term function as a hedge against economic and financial market uncertainty. Many investors believe that gold performs best in an inflationary environment. While there’s some truth to this, it’s closer to the truth that gold has historically outperformed in fear-driven environments. In other words, it’s not inflation, per se, that causes gold prices to rise. Rather, it’s the fear of inflation that is one of gold’s major price drivers over the longer term. Between the spreading worries over inflation, a jittery U.S. stock market, rising fuel prices/delivery disruptions and escalating tensions in the Middle East, gold has lots of fuel for its all-important “fear factor” revival. Indeed, fear has returned with a vengeance not seen since last year’s pandemic crash, and that’s a good reason to remain bullish on the yellow metal. New Recommendations/ Updates In the last issue I stated my high hopes for Barrick Gold (GOLD), the world’s second-largest gold mining company, since the firm is well positioned to benefit from the gold turnaround now underway. 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 $1,867 per ounce—and giving the firm plenty of room to take on additional projects. Barrick shares have rallied 8% since our recommendation, and I suggest taking partial profits here. (One of the rules of my technical trading discipline requires taking partial profits whenever a trading position is at least 8% to 10% higher from the initial entry point in order to lock in some of the gains regardless of what happens next. The rest of the position I let ride.) I also suggest raising the protective stop-loss to slightly below the 23 level. SELL A QUARTER Cleveland-Cliffs (CLF) is one of North America’s largest integrated steel makers and is seeing higher steel demand (and higher steel prices) thanks to the global economic recovery and tight supplies. Recent quarterly results provided some insights into why things are rolling for Cleveland-Cliffs, as discussed in the last issue. Since then, Bank of America has reinstated coverage of the company with a “buy” rating and an upside target of 25, referring to it as a free cash flow “machine.” I recommended that investors buy a conservative position in CLF last week, and I further suggest using a price slightly under the 18 level as the stop-loss. BUY Freeport-McMoRan (FCX) is poised to benefit from several years of an expected capital spending increase among copper miners. As one of the world’s top-four copper producers, Freeport also stands to benefit from China’s economic rebound in the months and years ahead. Among the many tailwinds the company is experiencing right now are higher average realized copper prices (up 100% since last April) and higher gold prices, with recent sales 9% above the company’s guidance in the fourth quarter. Management projects a copper sales increase of 20% over 2020, with gold volumes expected to rise by more than 50%—even as production remain 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. Last week, I advised investors to use pullbacks as a buying opportunity. I further suggest using a stop-loss slightly under the 39.35 level. HOLD Neal Fronerman, the CEO of South Africa-based platinum producer Sibanye Stillwater, told Barron’s recently that he views platinum-group metals as being in a bullish “supercycle” in the current decade. There are certainly some solid fundamentally-based arguments to support this proposition (including the potential for supply disruptions in top producer South Africa), thus I tend to lean long-term bullish on the white metal. We recently purchased a conservative position in the GraniteShares Platinum Shares ETF (PLTM), which is backed by the physical metal and is held in allocated bars (a daily updated bar list is posted at GraniteShares’ website at https://graniteshares.com). Platinum has lagged the recent gold and silver rally, but it remains buoyant and is within reach of its February all-time high at 1,350. Accordingly, I recommend that we maintain our long position in PLTM and keep the stop-loss unchanged at slightly under the 11.50 level. BUY We recently purchased a conservative position in the iShares Gold Trust (IAU), my preferred gold-tracking vehicle of choice (and the most actively traded of the U.S. exchange-listed gold ETFs). IAU was up strongly to start the latest week as fears over inflation widened. The safety trade in gold has been activated for reasons discussed above, and I’m expecting a fairly vibrant gold market this summer unless those fears are significantly allayed (mainly in the form of falling oil prices). I suggest raising the stop-loss on this position to slightly under the 17.09 level where the 25-day line’s presence is felt. (As a rule, you should generally avoid using round numbers when initiating protective stop orders due to the tendency for stop orders to build up at these levels, thus contributing to a “running of the stops” by large speculators.) BUY UNDER 17.60 Aggressive investors purchased a position in the iShares Silver Trust (SLV) last week. This is my preferred silver-tracking vehicle of choice and is one of the most actively traded of the U.S.-listed silver ETFs. Aside from the obvious inflation factor, silver is benefiting from several major areas of industrial demand. Silver expert Frank Holmes of U.S. Global Investors recently observed that the metal should become a key beneficiary of several emerging industrial applications, including the global rollout of 5G technology, solar power generation (e.g. solar panels) and the electric vehicle and automotive sector. On a technical note, SLV hit a yearly intraday high at 28 on February 1, leaving a rather prominent “air pocket” that I expect will be eventually filled (as is normal in such cases). I suggest raising the stop-loss to slightly under the 24.50 level (which is the current position of the 25-day moving average). BUY UNDER 26 It typically pays to own the mining stocks with superior relative strength (versus the XAU mining index and the S&P 500), and Newmont Mining (NEM) is the cream of the crop on this score. As previously pointed out, Newmont has 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. And it’s not only in a strong technical position, but in a solid fundamental position as well. 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. After the 10% rally from our initial recommendation, I suggest traders take partial profits and raise the stop on the remainder of the trading position. Suggested stop-loss slightly under the 67.50 level (our original entry point). SELL A QUARTER Teck Resources (TECK) is another major copper leader and is Canada’s largest diversified resource company, with one of the very best copper production growth profiles in the industry and projects located in attractive jurisdictions. As mentioned previously, the global manufacturing rebound now underway means that copper demand should increase in the coming year, along with zinc and steelmaking coal demand (two other aspects of Teck’s business). But the company is mainly focused on accelerating its copper production growth in order to rebalance its portfolio to what it calls “Green Metals” (that will benefit from the expected demand growth in alternative energy and vehicle production due to the red metal’s use in technology designed to reduce CO2 emissions). Teck also received a sentiment boost last week when hedge fund manager David Einhorn of Greenlight Capital recommended the company to investors based on strong global copper demand. Investors purchased some TECK last week during the pullback, and I now recommend raising the stop-loss to slightly under the 23 level. HOLD
| Stock | Price Bought | Date Bought | Price on 5/18/21 | Profit | Rating |
| Barrick Gold (GOLD) | 23.48 | 5/11/21 | 25 | 8% | Sell a Quarter |
| Cleveland-Cliffs (CLF) | 19.87 | 5/11/21 | 21 | 6% | Buy |
| Freeport-McMoRan (FCX) | 41.00 | 5/11/21 | 44 | 7% | Hold |
| GraniteShares Platinum Shares (PLTM) | 12.00 | 5/11/21 | 12 | 0% | Buy |
| iShares Gold Trust (IAU) | 17.36 | 5/11/21 | 18 | 4% | Buy Under 17.6 |
| iShares Silver Trust (SLV) | 25.23 | 5/11/21 | 26 | 3% | Buy Under 26 |
| Newmont Minint (NEM) | 67.00 | 5/11/21 | 74 | 10% | Sell a Quarter |
| Teck Resources (TECK) | 24.00 | 5/11/21 | 26 | 8% | Hold |
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%.