Gold’s “Fear Factor” in Full Gear
It’s the worry that just won’t go away, and while it’s disconcerting to equity investors, gold is clearly benefiting from it.
I’m referring of course to the latest coronavirus variant, the spread of which has contributed to the metal’s best showing since October. With virus case rates around the world exploding and news headlines becoming increasingly fixated on it, gold’s fear component has been reactivated and prices of the yellow metal are steadily creeping higher.
For December, gold gained 3% and is nearly 5% above its low for the month as of this writing. Its latest monthly gain is roughly equivalent, in percentage terms, to its last impressive showing in October (discounting the failed rally in mid-November).
I’m not a big statistics nut, nor do I place a great emphasis on historical (or seasonal) tendencies. That said, I think it’s worth mentioning that whenever gold opens the New Year with a positive showing in January, it tends to outperform for a substantial part of the year ahead (as it did in 2016, 2017, 2019 and 2020). There are exceptions to this tendency, including 2018, but the exceptions tend to occur when gold was already in an established bear market.
From a long-term perspective, the argument can be made that gold is still in a bull market that began in the fourth quarter of 2018. (Gold is, after all, 50% above its 2018 low and just 14% under its 2020 all-time high.) So, if we assume that the dominant trend for gold is still bullish, then a positive performance for the yellow metal in January would provide us with a clue as to what the next several months could bring for gold investors.
An even more pertinent clue will be how the U.S. dollar index performs in the next couple of weeks. Already we’re seeing signs that the greenback has lost some of its intermediate-term forward momentum and may be on the cusp of another (long awaited) correction. If that happens, then gold prices would almost certainly get another boost thanks to the metal’s currency component.
Elsewhere across the metals sector, LME aluminum stocks are on the downswing again in the face of lower production and supply chain obstacles. This positive fundamental backdrop has thus far benefited our aluminum holding (Alcoa), and prevailing industry tailwinds should boost the other major actively traded aluminum stocks in the coming months. For the full year, aluminum prices posted an impressive gain of 40%.
Copper, meanwhile, gained 25% in 2021 thanks in part to higher demand from top consumer China and, of course, supply chain disruptions. Industry reports suggest that in spite of renewed Covid-related lockdowns, manufacturing activity in China actually increased in December, which bodes well for near-term copper demand.
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 50, where the 50-day line is currently found. 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 can purchase a half position in FCX using a level slightly under 37 (closing basis) as the initial stop-loss. BUY A HALF
After underperforming the sector for much of 2021, Harmony Gold Mining (HMY) has lately been in a position of relative strength compared with gold, the benchmark PHLX Gold/Silver Index (XAU) and the broad market S&P 500 Index. Harmony is a world-class gold producer operating in South Africa and in Papua New Guinea, one of the world’s premier new copper-gold regions, and is also South Africa’s largest gold miner. In its fiscal Q1 2022 report, the company reported gold production of 413,714 ounces, representing a 32% increase from a year ago thanks to higher gold grades and metric tons milled. Moreover, management guided for 2022 gold production to be in line with, or above, last year’s production of 1.54 million ounces, with a midpoint forecast of 1.58 million ounces. Harmony is also focused on deleveraging its balance sheet going forward, and the market has been rewarding the firm’s recent de-risking measures. Traders recently purchased a conservative position in HMY using a level slightly under 3.75 (the 50-day line) as the initial stop-loss on a closing basis. Let’s maintain this stop for now. HOLD
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 6.35 (midway between the 25-day and 50-day lines). HOLD A HALF
MP Materials (MP) operates the largest rare earth mineral mines in the Western Hemisphere, currently accounting for around 15% of total global supply, with a focus on Neodymium-Praseodymium (NdPr)—a crucial input used for making rare-earth magnets used in many of those devices. MP opened Wall Street’s eyes to the oft-overlooked industry in Q3, boasting estimate-beating revenue that soared 143% from a year ago and 36% sequentially, while net earnings nearly tripled, prompting at least two major institutions to recommend the company. Management also reported generating a “significant” amount of cash from operations, which will be used to advance its Stage II and Stage III plans to restore the full rare earth supply chain to the U.S. (Most of the rare earth concentrates MP produces are sold to China through an intermediary, but its plans will allow it to bypass the middleman and fully process and sell NdPr straight to end users.) MP also got a boost when it was revealed that automaker General Motors (GM) has contracted with the firm to supply magnets for building motors for more than a dozen GM models. Most recently, J.P. Morgan analyst Michael Glick raised his December 2022 price target for MP from 45 to 52 (up 16%) based on higher rare earth prices. MP Materials’ move into rare-earth magnets “could drive multiple expansion for the company,” he said in a December 10 research report. Traders recently purchased a conservative position in MP and also booked some profit after the recent 14% rally (per the rules of our trading discipline). I recommend raising the protective stop on the remainder of the trading position to slightly under the 40 level (closing basis). HOLD 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 can do some nibbling here. I recommend using a level slightly under 8.75 (intraday) as the initial stop-loss. BUY 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 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. BUY A HALF
New Positions
Given the recent improvement to gold’s technical (and sentiment) backdrop, I’m placing our preferred tracking vehicle back on a buy. Accordingly, participants can purchase a half position in the GraniteShares Gold Trust (BAR) using an initial stop-loss slightly under 17.75 on a closing basis. This is admittedly a tighter stop than I normally employ, but it’s based on the well-known commodity trader Amos Hostetter’s 60% rule (i.e. exit a commodity position when it retraces more than 60% of the prior up-move). BUY A HALF
A while back, I placed Grinrod Shipping Holdings (GRIN) on our watch list as a potential buy. The stock never triggered my preferred entry point, however, and remained under weakness for almost three months. Since then, the stock has shown some notable technical improvement, while the company’s favorable fundamental backdrop has never changed. Grinrod 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 can purchase a half position in GRIN using a level slightly under 15.60 as the initial stop-loss (intraday basis). BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price 1/4/22 | Profit | Rating |
| Alcoa (AA) | 52 | 12/16/21 | 60 | 15% | Hold a Half |
| Freeport Copper & Gold (FCX) | 41 | 12/28/21 | 42 | 2% | Buy a Half |
| GraniteShares Gold Trust (BAR) | New Buy | - | - | - | Buy a Half |
| Grinrod Shipping Holdings (GRIN) | New Buy | - | - | - | Buy a Half |
| Harmony Gold Mining (HMY) | 3.95 | 12/21/21 | 3.93 | -1% | Hold |
| Lynas Corp. (LYSCF) | 5.85 | 11/16/21 | 7.44 | 27% | Hold a Half |
| MP Materials (MP) | 42 | 12/7/21 | 49 | 18% | Hold a Half |
| Sigma Lithium Resources (SGML) | 10 | 12/14/21 | 11 | 3% | Buy a Half |
| Vale S.A. (VALE) | 14 | 12/14/21 | 14 | 2% | 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%.