Can Gold Continue to Rally with the Dollar?
The idea that gold prices can rise while the dollar is strengthening appears, at first glance, to be a contradiction. After all, how can gold (which is priced in dollars) advance when the dollar is moving higher at the same time? Yet that’s exactly what is happening right now as both the yellow metal and the greenback rally simultaneously in one of the most anomalous market environments in recent memory.
Gold has risen almost 7% in just over a week and is up nearly 10% since the September 29 low for its best performance since May. The U.S. dollar index (DXY), meanwhile, is up over 3% since its early September low and up 6% since May. The gains in the dollar index may not sound very impressive, but they’re actually substantial given the normally stodgy nature of the currency market.
Many investors assume that gold trades in a perfectly inverse fashion against the dollar, so that when the greenback is strengthening, gold is weakening as a matter of course. This isn’t entirely true, however, as the relationship between gold and the dollar isn’t perfectly inverse and is at times a rather loose one.
In fact, history reveals several instances when both gold and the dollar have traveled in basically the same direction for extended periods.
For instance, the gold price posted a major low in August 2018 at around $1,180 an ounce and from there trended higher into February 2019 for a gain of 14%. During that same August 2018-to-February 2019 period, the dollar also trended higher (from 94 to 97.5). You might think this was the end of gold’s rally, especially considering the dollar’s continued rise all the way into September 2019 before finally peaking. But after a three-month correction in early 2019, gold took off again and continued its upward climb along with the dollar for months on end. It wasn’t until the spring of 2020, in fact, until the positive relationship between gold and the dollar finally broke.
Then, as now, a specific set of factors were at play that allowed this seemingly impossible positive correlation. For one, gold has more than just a currency component; it also has a sentiment-related component that has been called the “fear factor.”
I’ve long argued that gold’s fear factor is of even greater importance in determining its price trends than its currency component. To wit, if investors are increasingly worried about the economic or geopolitical outlook, they’re more likely to buy gold as a hedge against future economic or financial market volatility irrespective of currency market considerations.
It should also be kept in mind that the dollar itself can be a safe haven of sorts during times of financial market distress. In the 2018-2019 instance provided above, investors around the world were extremely worried about the brewing trade war between the U.S. and China. China’s stock market was subject to extreme volatility at the time, as were the equity markets of several major European countries.
The U.S. stock market, by comparison, was in much better shape, as were the U.S. real estate and bond markets. All things considered, the United States. offered a far better investment opportunity for global investors at that time. So, it’s not surprising that the nation attracted a tremendous amount of foreign capital inflows, which in turn strengthened the dollar—even as gold was being purchased by those same investors as a safe haven against a global recession.
I would argue that a somewhat similar situation is playing out right now. Investors in foreign countries are worried about things ranging from inflation to supply-chain problems to new Covid-related lockdowns and many other issues that could upset the global growth outlook. The U.S., meanwhile, remains a bastion of relative stability in an otherwise chaotic world and is experiencing an extraordinary bull market in both equities and real estate.
China, by comparison, is experiencing the effects of a tech crackdown, an energy crisis and a brewing debt crisis in its real estate sector. It’s not surprising that investors are choosing to take money out of foreign markets and transfer it to the U.S., which in turn is boosting the dollar’s value.
Moreover, there has been increasing demand for industrial commodities of late. As the economist Scott Grannis has observed, this has been confirmed by stronger capital goods orders in the U.S. as well as by a “noticeable increase in manufacturing activity.” Grannis believes this bodes well for continued growth here at home and sees this as being another possible explanation for the dollar’s recent strength.
Regardless of what the reasons are for the twin rallies in gold and the dollar, there are enough reasons to assume that the trend can continue in the foreseeable future with gold continuing to climb even as the greenback remains strong. Accordingly, I recommend that we maintain our bullish exposure to gold via our favorite tracking fund (see below).
Updates
Alliance Resource Partners (ARLP) is a metallurgical coal mining complex operator with approximately 1.7 billion tons of coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia, making it the second-largest coal producer in the eastern U.S. Alliance produces a diverse range of metallurgical coal with varying sulfur and heat contents, enabling the company to satisfy the broad range of specifications required by steelmaking and thermal customers. The company also generates royalty income from mineral interests in premier oil and gas producing regions in the U.S., primarily the Anadarko, Permian, Williston and Appalachian basins. Last month, the company released third-quarter results which saw revenue increase 17% while earnings more than doubled to 44 cents per share, beating estimates by 8 cents. Coal volumes rose 10%, and management pointed to “extremely strong” U.S. coal demand. (On a related note, Bloomberg recently reported that U.S. coal stockpiles at utilities fell to their lowest level since 1997.) Soaring natural gas prices have also helped boost coal’s demand profile as an alternate fuel source. I recommend using a level slightly under 10.50 (closing basis) as the initial stop-loss for this recently initiated trading position. BUY A HALF
With tin remaining in a position of strength, I recently placed Alphamin Resources (AFMJF) on a buy. Mauritius-based Alphamin explores and develops mineral properties and is a low-cost producer of tin concentrate from its high-grade deposit, Mpama North, part of the Bisie Tin Project in the Democratic Republic of Congo. (Mpama North is the world’s highest-grade tin resource—about four times higher than most other operating tin mines in the world—allowing Alphamin to produce 3% of tin produced globally.) Alphamin also mines and sells tin from its North Kivu mine, producing nearly 10,000 tons of tin annually. While Alphamin is recognized as a promising tin producer, it flies largely under the radar among mining stock analysts right now. Total revenues for 2021 are projected to be around $310 million, up 66% from a year ago. Participants purchased conservative position in AFMJF on October 7 using a level slightly under 58 cents as the initial stop-loss. I suggested taking a bit of profit last week after the stock’s 21% rally and raising the stop to slightly under 65 cents. I now suggest further raising the stop to slightly under 72 cents (near the 50-day line). HOLD
Canada-based uranium miner Denison Mines (DNN) has performed in line with other major exploration and development firms in what has been a bullish year for uranium. Denison’s flagship project is at Wheeler River, which has two high-grade uranium deposits, Phoenix and Gryphon. Phoenix is believed to possess the lowest production costs of any undeveloped uranium deposit, with all-in sustaining costs of $8.90 per pound (compared with current prices of around $32) and operating costs of just $3.33 per pound. All-in sustaining costs for Gryphon, meanwhile, are also a below-market $22.82 per pound, with a combined 109 million pounds of probable reserves and a 14-year mine life. Additionally, Denison recently agreed to acquire a 50% stake in the JCU Exploration Company from UEX Corp. JCU holds a portfolio of twelve uranium project joint venture interests in Canada, and the acquisition is expected to allow Denison to not only increase its indirect ownership of its flagship Wheeler River project, but also to expand its asset base to include additional important Canadian uranium development projects such as Millennium and Kiggavik. Denison is admittedly speculative, but with physical uranium supplies getting tighter thanks to the recent decision of the world’s largest uranium producer, Kazatomprom, to limit production in 2022 and 2023, the stock looks to be in a good position to continue a turnaround that began last year. In Q3, Dennison reported total revenue of C$9.5 million (up 248% from a year ago) on earnings of 4 cents, beating the consensus by 5 cents. Investors purchased a conservative position in DNN last month with a level around 1.40 as the initial stop-loss. After the recent 21% rally, I also suggest taking some profit if you haven’t done so and raising the stop on the remaining position to slightly under 1.70 on a closing basis. HOLD
With our favorite gold-tracking ETF, the GraniteShares Gold Trust (BAR), showing signs of life last month, I recommended doing some nibbling in the event gold prices surge ahead in the coming weeks on mounting inflation fears. To that end, participants purchased a conservative position in BAR on October 13 using a level slightly under 17.35 as the initial stop-loss (intraday basis). Let’s stand pat for now. I also suggest taking partial profits if BAR reaches 19 (the June peak and a potential resistance level) in the coming days. HOLD
Livent Corp. (LTHM) is the largest U.S. lithium-only miner, providing a range of lithium-based products and serving the EV, chemical, aerospace and pharmaceutical industries. Revenue and earnings projections for Livent are strongly optimistic for the next several years, with analysts expecting top-line growth of 34% this year and around 20% next year, while earnings are projected to grow at an even faster pace. For Q3, Livent reported estimate-beating revenue of $104 million, an increase of 43% from a year ago. Management also increased full-year 2021 guidance ranges for both revenue (from a previous $380 million midpoint estimate to a $400 million midpoint estimate) and EBITDA (from $62 million to $70 million). The company also provided an update on its near-term capacity expansions, with the 5,000 metric ton hydroxide addition in Bessemer City and initial lithium carbonate expansion of 10,000 metric tons in Argentina expected to reach commercial production by the third quarter of 2022 and the first quarter of 2023, respectively. Additionally, its phase two carbonate expansion for an additional 10,000 metric tons is scheduled to be in commercial production by the end of 2023. Participants on October 13 bought a conservative position in LTHM using a level slightly under 22.25 as the initial stop-loss. After rallying 21% since then, I recommend taking some profit in LTHM and raising the stop-loss on the remaining position to slightly under 28 (near the 25-day trend line). HOLD
Ryerson Holding (RYI) is a value-added distributor and processor of industrial metals, including stainless steel, aluminum, carbon and alloys. Most of its customers operate in the metals fabrication with exposure to electric vehicles, e-commerce logistics, automation and other industries. Aside from being an indirect play on the steel industry, Ryerson is also an infrastructure spending play. The company posted revenue of $1.6 billion in Q3, a 90% increase compared to the comparable 2020 quarter and up 14% sequentially. Per-share earnings of $3.25, meanwhile, beat the consensus by $1.50. Also in the third quarter, Ryerson achieved a record gross margin of 23% and announced a quarterly cash dividend increase to 9 cents per share. Investors purchased a conservative position in RYI on November 2, using a level slightly under 23 as the initial stop-loss on a closing basis. I recommend raising the stop to slightly under 24 after the latest rally (50-day moving average). BUY A HALF
We recently added Taseko Mines (TGB) after the stock broke above the 2 level. Canada-based Taseko is known mainly for being a mid-tier copper miner that operates the Gibraltar Mine, Canada’s second largest open-pit copper mine. Taseko produces more than just copper though, and the Gibraltar mine boasts proven reserves of 53 million pounds of molybdenum. Located in south-central British Columbia, Gibraltar has an estimated 18-year mine life and is located in a mining-friendly, low-risk jurisdiction. The company reported third-quarter results on November 3, which featured excellent production increases for both copper and molybdenum at the Gibraltar mine. Management said Gibraltar produced 35 million pounds of copper and 571,000 pounds of molybdenum in Q3, up 29% and 42%, respectively, on a sequential basis. Copper recoveries were 84.2% and copper head grades were 0.28%, in line with management expectations. Management added that Taseko is “well positioned for the year ahead as mining operations are smoothly transitioning into the Gibraltar pit, where grade is meeting expectations and the mills are efficiently processing the new ore.” Revenue of C$133 million came in 51% higher from a year ago during Q3, while per-share earnings of 10 cents topped expectations by 4 cents. After the recent 12% rally in TGB, I recommended taking some profit in TGB and raising the stop-loss to slightly under 2 (the original entry point) on an intraday basis. I suggest maintaining this stop for now. HOLD
Teck Resources (TECK) is one of the world’s largest copper producers and is also the second-largest seaborne exporter of coking coal, with four operations in Western Canada and significant high-quality steelmaking coal reserves. Going forward, Teck plans to double its copper production in the next two years, seeing demand for the metal dramatically increasing from the white-hot electric vehicle industry. A major Wall Street institution agrees, estimating Teck’s copper production will more than double from its “transformational” QB2 project (one of the world’s largest underdeveloped copper resources) in top producer Chile. In Q3, Teck handily beat analysts’ expectations for both earnings and revenue, driven by higher prices for metallurgical coal, with average realized coal prices more than doubling from a year ago. Copper prices jumped 43% and production for the red metal rose over 4%. Revenue of nearly C$4 billion was 73% higher from the year-ago quarter, while per-share earnings of $1.52 beat the consensus by 28%. Investors did some nibbling in the stock last month using a suggested initial stop-loss slightly under 24. Last month, I suggested raising the stop to slightly under 26 on a closing basis after the recent rally (maintain that stop for now). HOLD
New Positions
Lynas Corp. (LYSCF) is a rare earth mining company based in Australia and boasting one of the highest-grade rare earth mines in the world. Lynas is also the only producer of scale of separated rare earths outside of China, and it also operates the world’s largest single rare earth’s processing plant (in Malaysia). Among the rare earth oxides it produces are Neodymium and Praseodymium (NdPr), Lanthanum, Cerium and other mixed heavy rare earths. With the global rare earth supply chain being threatened by mining bans around the world, Lynas is poised to benefit from increasing demand for the key industrial elements it mines (particularly those used in magnets). Despite Covid-related production setbacks, the company reported strong demand from the magnet market and increased pricing for NdPr in the first quarter of fiscal 2022. Average selling prices across all product categories was more than double year-ago levels, while revenue of $122 million was the highest quarterly result on record for Lynas (up 40% from a year ago). The company also reported that its customers expect strong rare earth materials demand for magnets to continue and accelerate in 2022. Participants can purchase a conservative position in LYSCF using a level slightly under 5.20 (near the 50-day line) as the initial stop-loss on a closing basis. BUY A HALF
Given our relative lack of exposure to the white metals in what has been a steadily improving market backdrop for platinum and palladium, I’m placing the Sprott Physical Platinum & Palladium Trust (SPPP) on a speculative buy if it rallies decisively above 16.30 this week. Traders who don’t mind the above-normal volatility risk associated with both metals (palladium in particular) can purchase a conservative position in SPPP above 16.30, using a suggested initial stop-loss slightly under the 15 level on a closing basis. I’ll have more to say about the platinum/palladium outlook in next week’s regular report. BUY ABOVE 16.30
Portfolio
| Stock | Price Bought | Date Bought | Price 11/15/21 | Profit | Rating |
| Alliance Resource Partners (ARLP) | 12 | 10/13/21 | 11 | -9% | Buy a Half |
| Alphamin Resources (AFMJF) | 0.73 | 10/8/21 | 0.80 | 10% | Hold |
| Dennison Mines (DNN) | 1.65 | 10/19/21 | 1.94 | 18% | Hold |
| GraniteShares Gold Trust (BAR) | 18 | 10/13/21 | 19 | 5% | Hold |
| Livent Corp. (LTHM) | 26 | 10/13/21 | 30 | 15% | Hold |
| Lynas Corp. (LYSCF) | New Buy | - | - | - | Buy a Half |
| Ryerson Holding (RYI) | 26 | 11/2/21 | 28 | 5% | Buy a Half |
| Taseko Mines (TGB) | 2.05 | 10/12/21 | 2.11 | 3% | Hold |
| Teck Resources (TECK) | 28 | 10/12/21 | 27 | 0% | 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%.