Inflation’s Paradox One of this year’s greatest paradoxes has been inflation’s return. On the one hand, the rising tide of inflation has lifted industrial metal prices to levels not seen in over a decade. But on the other hand, gold and other precious metals haven’t really benefited from it. What’s the reason for this seeming contradiction? The best answer I can provide is that while inflation—which can be roughly defined as “too much money chasing too few goods”—has been significant enough to boost the prices of metals used in everyday industrial and consumer good applications, it hasn’t been sustained enough to stoke massive fears over the dollar’s safety. For this reason, investors aren’t yet sufficiently motivated to seek the protection of gold. In order for gold to benefit from inflation, it must be both powerful and persistent across all, or most, consumer goods categories. In fact, some economists don’t consider that inflation is a genuine threat unless wages, interest rates and consumer prices are rising steadily in unison (i.e. month by month or quarter after quarter). And while wholesale and retail prices are definitely higher than they’ve been in recent years, they’re not necessarily increasing in a consistent fashion. (This was highlighted in a September 19 Wall Street Journal article, “Inflation is All Over the Place.”) The inflation paradox extends to both food and fuel prices. The former is definitely on the upswing, as shown by data provided by the U.N. Food and Agriculture Organization (FAO). The following graph illustrates that food prices are the most expensive they’ve been than at almost any time in the last 60 years. 
Fuel prices are also rising, though not to the same extent as food prices. In contrast to food, nationwide retail gasoline prices, as measured by the U.S. Energy Information Administration (EIA), are still under the prior peak from 2012 (when they hit $4/gallon). 
The fact that gas prices aren’t running away on the upside is a key consideration in the inflation discussion given that higher fuel prices result in across-the-board higher retail goods prices due to increased transportation costs. Thus, a sustained increase in the inflation rate—the kind that would convince investors the dollar is being seriously threatened—will likely require higher energy prices. On that score, the U.S. dollar index (USD), which can be used to measure inflation’s vigor, doesn’t currently reflect a durable inflationary trend. And as emphasized in recent reports, a significantly weaker dollar is likely needed before investors feel the need to urgently expand their safety-related gold buying. 
For industrial metal prices like aluminum and copper, however, it’s not the “fear factor” that’s needed to push prices higher. Rather, it’s the current red-hot automotive and construction markets, along with increased infrastructure-related demand, that’s driving those markets. Supply chain problems further serve to boost prices for the key industrial metals, and it doesn’t take much to upset the supply/demand balance for such metals and other critical commodities. A case in point is Vietnam, where many manufacturers moved their plants in recent years in order to avoid tariffs relating to the U.S.-China trade war. Last week, however, Vietnamese officials extended Covid-related restrictions in Ho Chi Minh City, the nation’s main business center, which in turn roiled the global supply chain. Moreover, China’s recent decision to curb copper and steel output in an attempt to cut its carbon emissions provides another high-profile instance of a supply chain shock. The bottom line is that the paradox of weak precious metals and strong industrial metals prices—both in the face of higher inflation—is likely to persist in the near term in the absence of a sustained rise in inflation pressures. Last month’s slight drop in the Consumer Price Index (CPI) was enough to convince some economists that inflation may be peaking. While this isn’t likely to be the case given the persistence of global supply shocks, the fact that many investors aren’t sufficiently worried about a loss of purchasing power is likely enough to keep gold and silver prices subdued in the near term. And that means where precious metals are concerned, the waiting game continues. 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 was $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. BUY A HALF 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 80 on a closing basis. HOLD We were stopped out of speculative long position in the GraniteShares Gold Trust (BAR) on September 16 after its decisive intraday move under the 17.70 level. As mentioned in last week’s trade alert, we’ll wait for the previous metals broad market to bottom out and (ideally) for the dollar index to weaken before making any additional trades in BAR. SOLD Earlier this month I put the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN) back on a buy after the recent strengthening in the nickel price. 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. That said, I recommended only a small, conservative position in this nickel-tracking vehicle. I also suggest using an initial stop-loss slightly under 23.90 (the nearest pivotal low) on an intraday basis for this trading position. BUY A HALF We were stopped out of our speculative half position in the iShares Silver Trust (SLV) on September 17 when our stop-loss slightly under the 21 level (intraday basis) was violated. I noted previously that a decisive close above the 50-day moving average is needed to confirm a reversal of the intermediate-term downward trend in SLV, an observation that I reiterate here. SELL To gain some exposure to the rare earths sector, I added the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) to our list of holdings on September 14. Per the fund’s prospectus, REMX “is intended to track the overall performance of companies involved in producing, refining and recycling of rare earth and strategic metals and minerals,” including tungsten, cobalt, lithium and others mentioned here. I suggest nibbling on weakness and using an initial stop-loss slightly under 100. BUY A HALF Portfolio
| Stock | Price Bought | Date Bought | Price 9/21/21 | Profit | Rating |
| Alcoa (AA) | 45 | 9/7/21 | 45 | 1% | Buy A Half |
| GraniteShares Gold Trust (BAR) | - | - | - | - | Sold |
| Global X Lithium & Battery ETF (LIT) | 69 | 6/10/21 | 80 | 16% | Hold |
| iPath Nickel Total Return ETN (JJN) | 26 | 9/9/21 | 25 | -6% | Buy a Half |
| iShares Silver Trust (SLV) | 22 | 9/1/21 | 21 | -6% | Sell |
| Nucor Corp. (NUE) | - | - | - | - | Sold |
| VanEck Rare Earth/Metals ETF (REMX) | 117 | 9/13/21 | 106 | -10% | Buy a Half |
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%.