March 15, 2022

Metals Soar as Crisis Unfolds
For more than a year, gold remained stuck in a holding pattern while other metals roared higher in response to global manufacturing demand and supply shortages. All the while, the global economic and geopolitical situation was becoming increasingly tenuous, prompting us to repeatedly wonder when a flight to the safety of gold would transpire.

That question was decisively answered early last month after the yellow metal broke out from its consolidation pattern and ran up almost 40% in just a five-week period. In doing so, gold finally overcame the psychologically significant $2,000 an ounce level that many investors view as a benchmark letting them know that inflation, along with geopolitical risk, is on the rise. (Matt Miskin of John Hancock Investment Management fittingly calls gold a “geopolitical hedge.”)

That inflation has become a touchstone issue is continually confirmed by the news on a daily basis, including last week’s headline U.S. inflation print that rose nearly 8% in February to the highest level in more than 40 years!

What’s more, the inflation ogre doesn’t look to be disappearing any time soon, as Russia’s war with Ukraine has driven fuel costs to record highs, along with prices for several key commodities—not least of which is wheat.

Indeed, grain prices are soaring to levels unseen in decades as the specter of global food shortages haunts several regions of the globe due to their reliance on now-sanctioned Russian wheat. This in turn further increases gold’s attractiveness as a safe haven during this time of worldwide crisis, while pushing gold’s sister metal, silver— up nearly 20% since early February —back into the investment spotlight.

Global demand for the white metal is expected to hit a record this year, as silver’s much lower price relative to gold affords smaller investors a chance to ride expensive gold’s bull market. Incidentally, The Silver Institute projects physical silver demand will increase 10% in 2022, to 290 million ounces—a forecast that could easily prove too conservative.

Gold and silver aren’t the only metals benefiting from this time of crisis, however. Last week, the London Metals Exchange halted nickel trading as Chinese nickel giant Tsingshan Holding Group, the world’s largest producer of the metal, purchased huge amounts of nickel to reduce its short positions and exposure to margin calls, “turbocharging a rally fueled by the conflict in Ukraine,” in the words of a Reuters report, and forcing the LME to settle all trades on cash only instead of physical nickel. [A JPMorgan-led consortium of bankers, some of which are on the hook for several billions in unpaid margins, gathered over the weekend in an attempt to fix the still unresolved nickel crisis.]

Similar shortages are now being experienced in other key metals including titanium, steel, copper and aluminum. Consequently, with prices dramatically rising and supplies decreasing for each of these important metals, global economic growth rates are expected to slow this year, providing investors with yet another reason to own gold (i.e. recession risk).

Then there’s the energy metal, uranium, which has exploded 36% since late February in response to war-related spikes in oil and gas prices. Russia’s war with Ukraine has left Europe’s energy sector in limbo as the continent heavily relies on Russian-supplied natural gas for heating and electricity generation. This makes nuclear power generation an attractive prospect for many nations, a point noted in an International Energy Agency report on how Europe can reduce its Russian energy imports by increasing production at existing nuclear facilities.

Needless to say, I expect that our holdings in the above-mentioned metals (excluding titanium) should benefit from the various war-related crises that have unfolded—and likely will continue unfolding—around the globe. Gold in particular should maintain its supporting bid over the intermediate term as safety-seeking has evidently supplanted risk-taking among investors.

Note: In the portfolio, we have no new additions this week.

Updates
On February 8, we bought a new trading position in Alcoa (AA) based on its technical and fundamental strength. Alcoa easily beat expectations in Q4 in reporting a 40% increase in sales and earnings per share of $2.50 (a 59-cent beat). The company generated revenue of $12.2 billion for the full year, up 31% from a year ago and the highest since 2018, while recording its highest ever annual net income and per-share earnings of $2.26. Going forward, the company sees higher aluminum prices as a major tailwind and plans to continue its strategy of reducing debt and pension obligations while increasing shareholder returns, recently initiating a new $500 million share repurchase program. Wall Street, meanwhile, sees revenue growth of 14% in Q1 and per-share earnings growth of around 200%. Last month, I recommended that we book a quarter profit in AA after the stock’s 10% rally. Last week, I suggested selling another quarter in AA after the last week’s rally. I now recommend exiting the remainder of our position in AA as of March 14 now that the stock has violated 75 level on a closing basis. SELL

Uranium and uranium miners were in the doldrums for several months after prices peaked last fall, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is attracting new interest among investors in the wake of Russia’s invasion of Ukraine, while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—recently provided us with another attractive entry point after correcting almost 40% between November and January. Participants subsequently purchased a conservative position in URA on March 1, using an initial stop-loss slightly under the 20 level (closing basis). After the 13% rally in URA from our initial entry point, I now recommend locking in 50% profit and raising the stop to slightly under 23 (closing basis) on the remaining position. SELL A HALF

South Africa-based Gold Fields Ltd. (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of over 2 million ounces, attributable gold-equivalent mineral reserves of 52 million ounces and mineral resources of 116 million ounces. The stock typically outperforms the physical metal when gold is in an established intermediate-term rising trend. Management said it expects production to grow by an additional 20% to 30% over the next three to four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Additionally, Gold Fields said it will pay a final dividend of 2.60 rand per share, taking the total payout for the year to 4.70 rand per share. After buying a conservative position in GFI on February 17, the stock has since rallied 30%. Per the rules of my trading discipline, I recently recommend taking 50% profit. I also recommend raising the stop-loss on the remaining position to slightly under 13.25 (closing basis). HOLD A HALF

With inflation likely to persist, not only industrial metals but commodities in general should generally outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e. fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason, I expect DBC—which is heavily skewed toward the energy sector—to continue to outperform. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. After the 21% rally since our initial entry, I suggest taking 50% profit in this position while maintaining the stop at slightly under 24.30 (closing basis) on the remaining position. HOLD A HALF

I placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy on January 10 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. I also recently recommended taking a 50% profit in this position after January’s big rally. We were stopped out of the remainder of our trading position in JJT last week after our stop-loss at slightly under 132 was violated on a closing basis. The volatility in the tin market is far too great right now to recommend any new tin-related positions, but I’ll be monitoring the market for a future possible re-entry point. SOLD

Prices for steel making coal are on the rise due to the improved outlook for steel production and consumption globally. Natural Resource Partners (NRP) 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. The company also just declared a 45-cent per share quarterly dividend last week (4.8% yield). Q4 earnings are expected on May 11. Participants recently purchased a conservative position in NRP, and after a 10% rally, I recommended selling a half and raising the stop on the remaining position to slightly under 34.50. I now suggest raising the stop a bit higher to slightly under 36 (closing basis) where the 50-day line comes into play. HOLD A HALF

Reliance Steel & Aluminum (RS) is the largest metals service center operator in North America, providing metals processing, inventory management and delivery services for several industries, including construction, energy, electronics, automotive and aerospace. With metals demand and pricing buoyant in each of these key industries, Reliance finished 2021 on a high note, setting records in a number of key metrics despite supply-chain disruptions and labor market tightness. The company also returned over $500 million to shareholders through dividends and buybacks, with $713 million remaining on a $1 billion share repurchase authorization. Further out, management said it was optimistic about business conditions across its end markets and estimates a 6% increase in tons sold for Q1 compared to the year ago. Reliance also guided for Q1 per-share earnings to range between $7.05 and $7.15 (up 4% sequentially at the midpoint and in line with estimates). In view of the relative strength in this dual steel/aluminum company, traders can purchase a conservative long position in RS using a level slightly under 170 as the initial stop-loss. BUY A HALF

Traders who want some exposure to the platinum group metals recently purchased a conservative position in the Sprott Physical Platinum & Palladium Trust (SPPP). This closed-end trust invests in unencumbered and fully allocated good delivery (redeemable for metals) physical platinum and palladium bullion. After the 15% rally in SPPP since our initial entry, I suggested taking 50% profit last week and raising the stop-loss on the remaining position. I further recommend selling the remainder of this position now that SPPP has violated our stop-loss as of March 14. SELL

In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), we added Teck Resources (TECK) on February 8. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. Teck also raised its annual base dividend to 50 cents per share (from 20 cents), and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit top line and triple-digit bottom line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons, (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I previously suggested booking 50% profit. I also recommend raising the stop-loss on the remainder of this trading position to slightly under 37.10 on a closing basis. 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. 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. I recommend raising the stop-loss on our remaining long position in VALE to slightly under 17.50 on a closing basis. Vale has given us 41% profit since December, but the stock is now starting to run up into what could prove to be strong overhead supply/resistance extending to around 22. Moreover, the nickel market (which Vale partly represents) is admittedly facing a crisis in the wake of the Russia/Ukraine situation which could exert continued spillover impacts on Vale and other nickel-related stocks. HOLD A HALF

Portfolio

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%.