Inflation Still the Watch Word
Inflation is a major concern as we enter the fourth quarter, with recent supply-chain problems boosting already high prices for many key commodities, including select industrial metals. Gold and silver, however, have so far remained unresponsive to mounting inflation pressures for reasons we’ll discuss here.
Let’s briefly review some of the key metals covered in this report, starting with the strongest performers and working down to the weakest.
Lithium prices remain elevated and are close to record highs. Lithium has increased more than 250% in the year to date, based on a benchmark tracking index for the battery metal.
Steel prices are also buoyant, as China’s production fell in August and September amid environmental restrictions hitting the nation’s steel mills. Automotive and construction-related demand for the metal is also keeping prices elevated, with Shanghai futures nearing the record levels hit earlier this year.
Aluminum prices recently hit a 13-year high but pulled back last week after China announced plans to release 70,000 tons of the white metal on October 9. Counterbalancing the increased supply pressure, however, is China’s latest power control policy designed to restrict steel and non-ferrous metal producers to just two days per week of operations in a bid to keep power consumption subdued. Consequently, aluminum prices remain firm and are within easy reach of recent highs.
Copper prices, meanwhile, are still subdued after peaking around $4.75 per pound in May and are 12% below that high as of this writing, but are still up 20% for the year. Recent data from the Shanghai Futures Exchange showing China’s copper inventories falling for the seventh straight week (the lowest since June 2009) should help establish an intermediate-term bottom for red metal prices, however.
Precious metals remain the laggards, with gold down 8% from its June peak of $1,920 an ounce (but up 3% for the year). Silver, meanwhile is down a whopping 25% from this year’s high around $30 an ounce and down 20% from its June intermediate-term peak.
Keeping a lid on the metals has been the near-complete lack of fear on the part of investors. This can be divined from elevated equity markets (despite last month’s 5% dip in the Dow 30 index), relatively low CBOE Volatility Index levels (i.e. below 25), recent rallies in hyper-speculative cryptocurrencies and ultra-low credit spreads. As I’ve continually emphasized in recent reports, until we see a healthy dose of fear returning to the financial markets, gold and silver will likely remain in the laggard’s position.
There is, however, at least one preliminary sign that a trend change for gold could be on the horizon. While neither gold nor silver have managed to close above their technically important 25-day moving averages, it should be noted that platinum has recently managed this feat. This is worth mentioning since relative strength in platinum often serves as a leading indicator for gold and silver.
If platinum can confirm this latest show of strength by making a higher high (i.e. by closing decisively above $1,000 an ounce), we could have the early makings of a gold turnaround on our hands. (This will be subject, of course, to additional improvements in the other technical-, sentiment- and currency-related factors we use in this report for evaluating gold’s price strength.)
On the shipping front, several major ports in California are facing record backlogs of cargo ships in a strain to businesses short on inventories. Adding to these woes, Business Insider reported that shipping ports in New York, New Jersey, Texas and Georgia have lately seen record pileups, creating a ripple effect across the entire U.S. supply chain.
Reflecting the high demand and tight supplies for shipped goods, the Baltic Dry Index (the benchmark price index for moving major commodities by sea) just hit a 13-year high. The index was up 12% for the latest week and about 53% for the third quarter, driven mainly by high iron ore cargoes from Brazil and Western Australia, coal imports, steady charters and higher rates.
I’m mentioning this since the Baltic Dry Index can be considered a gauge of industrial metals demand, particularly steel. For this reason, I’m going to place an iron ore cargo shipper on our watch list of stocks for October (see below).
Updates
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 were $1.63, $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. HOLD
I recently placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy after some strengthening in the tin price following 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. I also suggest using an initial stop-loss slightly under the 100 level on an intraday basis for this trading position. HOLD
To gain some exposure to the rare earths sector, we recently added a conservative position in the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) to our list of holdings recently, nibbling in REMX on weakness and using an initial stop-loss slightly under 100. We were stopped out of this trading position on October 4 when REMX triggered this stop. SOLD
Watch List
One way of getting some investment exposure to both copper and the strong-performing molybdenum market (up 115% YTD) is by owning shares of Taseko Mines (TGB). 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 situated in a mining-friendly, low-risk jurisdiction. Total molybdenum production for the company in the second quarter of 2021 was 402 thousand pounds. Taseko reported that molybdenum prices strengthened in Q2 and averaged $14.32 per pound (27% higher sequentially). Copper production for Q2 was 20% higher from a year ago, while cash flow from operations was $72.5 million (nearly double from a year ago). Things are expected to strengthen for the firm moving forward. Management said the current copper price and expected production growth is supportive of improved financial performance at the Gibraltar mine over the remainder of 2021.
What to Do Now
Investors can do some nibbling in TGB on a close above 2 (the level that has stopped all previous rally attempts since July). I’ll update this position assuming the 2 level is overcome in the coming week. BUY A HALF ABOVE 2
Grinrod Shipping Holdings (GRIN) is an international shipping company focused on minerals, ores, coal and other commodities. The company owns, charters in and operates a fleet of dry bulk carriers and owns one medium range tanker. The stock’s strength in the past year is a reflection of underlying demand for industrial metals and typically tracks key metals like steel. Most of Grinrod’s fleet trades on index-linked cargo contracts, short-term time charters or in the spot market, which allows the company to benefit from strong freight rates (as reflected by the recent highs in the Baltic Dry Index discussed earlier in this report). The firm also recently announced the closing of an acquisition of a 31% stake in its IVS Bulk joint venture, which should boost future revenues. Grindrod further announced that it repurchased around 92,000 common shares at an average price per share of $14.87.
What to Do Now
A recent 25% dip in GRIN after peaking at 19 last month likely shook out most of the weak hands while cooling off an overheated technical condition for the stock. Shares found support around the widely-watched 50-day moving average, which is encouraging. I’d like to see some additional firmness in this stock before committing to the buy, mainly in the form of a close above the 25-day line at 16.75. I’ll update this situation in upcoming reports. WATCH
Portfolio
| Stock | Price Bought | Date Bought | Price 10/5/21 | Profit | Rating |
| Alcoa (AA) | 45 | 9/7/21 | 49 | 8% | Hold |
| iPath Nickel Total Return ETN (JJN) | - | - | - | - | Sold |
| iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) | 105 | 9/28/21 | 104 | -1% | Hold |
| VanEck Rare Earth/Metals ETF (REMX) | - | - | - | - | Sold |
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%.