Gold: 2022 Holds More Promise than Last Year
Last year was a stellar one for commodities in general and for industrial metals in particular. Copper, steel, aluminum, nickel and lithium all had stellar gains. There were some declines along the way, but the overall trajectory for the majority of base and semi-precious metals was up.
The notable exception to the 2021 metals bull market, however, was gold. The yellow metal conspicuously failed to participate in the broad commodities through most of the year and finished with a 6% loss. (Gold’s sister metal, silver, fared even worse with a 15% loss for the year.)
So why did precious metals like gold underperform while industrial metals shined? The answer is twofold: gold’s dominant drivers are its fear component and its currency component, and both were in less-than-ideal shape through most of 2021.
Gold’s fear component was called into question for a substantial part of last year as investors, by and large, expected the economy to open up and Covid restrictions to abate. And for the most part, that’s what happened. Moreover, the equity market as measured by the S&P 500 Index soared through last year, which took some of the safety-related demand away from the metal.
Then there’s gold’s currency component, which was hampered by persistent strength in the U.S. dollar for most of last year. The U.S. dollar index (USD) ended up gaining 7% for the year—which is fairly substantial in currency terms. Since bullion is priced in dollars, the greenback’s relentless strengthening served as a significant headwind to any kind of a meaningful gold rally.
A final consideration worth mentioning is gold’s relationship to interest rates. As Juan Carlos Artigas of the World Gold Council recently observed, gold prices also reflect worries about future inflation and future changes in the cost of borrowing money. Artigas noted that in 2021, both factors were at odds with each other, with Treasury bond yields competing for investors’ attention versus non-yielding bullion.
But, Artigas added, that could soon change. “Investors are getting more worried that the inflation jump isn’t transitory,” he said. And with inflation hitting its fastest clip since 1982—and consumer prices rising by 7% (essentially canceling out the dollar’s gain last year)—gold has a newfound “hook” with which to lure investors in the new year.
Indeed, one of the most widely used terms used in financial headlines in the last few weeks has been the word “inflation.” Investors are clearly worried that the dollar’s value will deteriorate in the coming months. And while some economists believe inflationary pressures will abate later on in the year, there’s enough evidence to support higher commodity prices in the intermediate term. And while we don’t yet have a decisive buy signal for gold, that signal is more likely than not to occur as we head further into what looks to be another bullish year for the overall metals sector.
Updates
Among the most actively U.S.-traded aluminum stocks, Alcoa (AA) has not only outperformed the industry lately but is also in a relative strength position versus the broad equity market as reflected in the benchmark S&P 500 Index (as discussed in last week’s trade alert). From an earnings standpoint, Alcoa set a record for quarterly net income in Q3, prompting management to initiate a quarterly cash dividend (10 cents per common share). Revenue was up by a solid 32% from a year ago and well ahead of Wall Street’s estimates, driven by higher aluminum prices and higher premiums for value-added products. Liquidity isn’t an issue, either, as Alcoa had a cash balance of nearly $1.5 billion at quarter’s end, with no substantial debt maturities until 2027. Moreover, the company just launched a half-billion-dollar stock buyback plan. All these factors prompted a major institution to give Alcoa a “conviction buy” rating, the upgrade was also due to Alcoa’s efforts at decarbonizing its portfolio while supporting the “green transition.” Accordingly, I recommended on December 16 that participants purchase a conservative position in AA, using a level slightly under 45 as an initial protective stop. On December 22, I recommended taking half profits in AA after the latest 17% rally. I further suggest raising the stop-loss on the remaining position to slightly under 55. HOLD A HALF
Freeport-McMoRan Copper & Gold (FCX) is back on our radar after the stock’s latest show of relative strength. Not only is FCX manifesting strength versus the copper price, it has even begun to strengthen relative to the broad market S&P 500 Index. Based on the fundamental outlook for copper mentioned above, FCX could prove to be a top performer among the most actively traded copper producers. In its latest financial quarter, Freeport topped earnings estimates but missed revenue estimates, as copper prices rose while weaker gold prices weighed on sales. Net income soared to $1.4 million from $329 million in last year’s Q3, while revenue increased 58% to just over $6 billion. Consolidated copper sales were up 22% in the quarter, while gold sales jumped 72%. Average realized prices for copper were higher, while realized gold prices were lower from the year-ago quarter. Looking ahead, management said “the outlook for the copper market is extraordinarily positive,” and expects higher full-year sales for the metal. Traders recently purchased a half position in FCX using a level slightly under 37 (closing basis) as the initial stop-loss. I recommend raising the stop to slightly under 40 (closing basis) after its latest rally. BUY A HALF
Grinrod Shipping Holdings (GRIN) is an international shipping company focused on minerals, ores, coal and other commodities. The company owns, charters and operates a fleet of dry bulk carriers and owns one medium range tanker. The stock’s strength in recent weeks is a reflection of improving global demand for industrial metals (it 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. Revenue in the third quarter was 150% higher from a year ago, while per-share earnings of $2.28 beat the consensus by 19 cents. Traders recently purchased a half position in GRIN using a level slightly under 15.60 as the initial stop-loss (intraday basis). BUY A HALF
I recently placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy after the improvement in the tin price after a brief stumble in December. 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. Last week, I recommended buying conservative position in this tin-tracking vehicle. I also suggested using an initial stop-loss slightly under the 115 level on an intraday basis for this trading position. I now recommend raising the stop to slightly under 117 (the current location of the 50-day moving average) after the recent rally. BUY A HALF
In early December I suggested selling half our stake in Lynas Corp. (LYSCF), a rare earth mining company based in Australia and boasting one of the highest-grade rare earth mines in the world (including neodymium and praseodymium (NdPr), lanthanum, cerium and other mixed heavy rare earths). Participants previously bought a conservative position in LYSCF using a level slightly under 5.25 as the initial stop-loss on a closing basis. But after rallying 15% from our initial entry point, it was time to take some profit based on the rules of our technical trading discipline. I also suggest raising the stop-loss on the remaining position in this stock to slightly under 7.25. HOLD A HALF
As previously discussed, prices for steel making coal are on the rise, which is partly attributable to the improved outlook for steel production and consumption globally. A beneficiary of higher coal prices is Natural Resource Partners (NRP), which is a master limited partnership, engaged in owning and managing a diversified portfolio of mineral reserve properties, including coal and other natural resources (mainly gas and timber). Approximately 65% of the firm’s coal royalty revenues and around 45% of coal royalty sales volumes were derived from metallurgical coal in the latest quarter, making the stock a good proxy for steel demand. In the third quarter, the company reported revenues of $57 million that were 90% higher from a year ago. Per-share earnings of $1.10, meanwhile, beat consensus expectations by 28 cents. Management said it sees steel demand “remaining strong” going forward, as the global economic recovery is “more than offsetting” Covid-related challenges. The company also said it remains committed to finding alternative revenue sources across its large portfolio of land, mineral and timber assets. Participants last week purchased a conservative position in NRP using a level slightly under 31 as the initial stop-loss on a closing basis. After last week’s 10% rally, I recommend selling a half and raising the stop on the remaining position to slightly under 32.50. SELL A HALF
Sigma Lithium Resources (SGML) is a Canada-based, exploration-stage lithium developer with access to the largest hard rock lithium deposits in the Americas, located in its wholly owned Grota do Cirilo Project in Brazil. The company has been producing low carbon high purity lithium concentrate at an on-site demonstration pilot plant since 2018, with plans to reach near-term commercial stage production (initially in 2022) and eventually producing 220,000 tons annually of battery grade lithium concentrate. It’s admittedly a speculative play with sovereign and mining-related risks in Brazil. But with its substantial, high grade and low impurity resource, coupled with booming lithium carbonate and hydroxide prices, the risk appears justified. Accordingly, speculators who don’t mind the risk recently did some nibbling, and I recommended using a level slightly under 8.75 (intraday) as the initial stop-loss. After the latest 10% rally, I recommended last week selling half this position and raising the stop-loss to slightly under 9.50 (intraday) near the 50-day line. Let’s maintain this stop for now. HOLD A HALF
Vale S.A. (VALE) is one of the world’s largest iron ore and nickel miners, as well as a diversified producer of other industrial and precious metals. Earlier this year, the company garnered attention when management announced an ambitious plan to reach 400 million tons of iron ore production by 2022, which, if realized, would be a 33% increase from 2020’s total production. More recently, though, Vale has shifted its focus on so-called “green” metals in an effort to diversify and generate higher shareholder returns. Vale recently guided for copper production to increase to a midpoint of around 345,000 tons per year, led by the firm’s Salobo 3 expansion copper project, while nickel production is expected to reach around 185,000 tons per year. Additionally, Vale’s outlook received a boost from the recently passed $1 trillion infrastructure spending bill, which would dramatically expand fiscal spending for roads, water pipes, EV charging stations and other infrastructure, in turn necessitating higher industrial metal production volumes. Analysts, meanwhile, expect Vale’s revenue for full-year 2021 to increase 34% while per-share earnings improve 85%. From a technical standpoint, VALE is coming off a 1-year low near 12 but appears to be bottoming out. Any improvement in the iron ore, copper and nickel prices from here should provide a boost to the stock. Traders who don’t mind the China-related volatility risk did some recent nibbling around current levels, using a level slightly under 12 as the initial stop-loss on a closing basis. After the recent 10% rally, I suggested taking 50% profits and raising the stop to slightly under 13 (closing basis). I now recommend raising the stop to slightly under 13.30 (closing basis) where the 50-day line comes into play. HOLD A HALF
New Positions
Metallurgical coal demand is rising as industry gears up for higher manufacturing output in 2022, plus coal prices are up almost 60% since November. What’s more, the stock prices of several major bulk shippers (the ones that specialize in iron ore deliveries) are also heating up. Putting it all together suggests that steel demand will likely increase in the foreseeable future, and that means it’s time to take a closer look at some of the leading steel producers. The one that stands out the most to me right now is stalwart U.S. Steel (X), whose stock price has been consolidating in a narrowing trading range in the last several weeks. The company has been expanding of late, with plans to erect a new $3 billion steel factory in Arkansas, near its Big River Steel plant (which amounts to the biggest capital investment project in the state’s history). Moreover, the latest reports suggest that China’s central bank may ease monetary policy before the Lunar New Year holidays, which is potentially good news for the world’s top steel consumer (and for U.S. Steel by extension). A final consideration is the tight supply situation for hot-rolled coil steel, which further supports higher prices in the intermediate term. On the financial front, analysts foresee U.S. Steel’s revenue increasing a whopping 112% when the company reports Q4 results on January 26, followed by a 58% revenue increase in Q1 2022. An additional attraction is the approximately $200 million remaining under the company’s $300 million stock buyback authorization. Participants can purchase a conservative position in X using a level slightly under 23.50 as the initial stop-loss on an intraday basis. BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price 1/18/22 | Profit | Rating |
| Alcoa (AA) | 52 | 12/16/21 | 60 | 15% | Hold a Half |
| Freeport Copper & Gold (FCX) | 41 | 12/28/21 | 44 | 7% | Buy a Half |
| Grinrod Shipping Holdings (GRIN) | 18 | 1/4/22 | 19 | 5% | Buy a Half |
| iPath Tin Total Return ETN (JJT) | 120 | 1/11/22 | 126 | 4% | Buy a Half |
| Lynas Corp. (LYSCF) | 5.85 | 11/16/21 | 8.09 | 38% | Hold a Half |
| MP Materials (MP) | - | - | - | - | Sold |
| Natural Resource Partners (NRP) | 35 | 1/11/22 | 38 | 10% | Sell a Half |
| Sigma Lithium Resources (SGML) | 10 | 12/14/21 | 11 | 5% | Hold a Half |
| U.S. Steel (X) | New Buy | - | - | - | Buy a Half |
| Vale S.A. (VALE) | 14 | 12/14/21 | 16 | 15% | Hold 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%.