Dollar Strength is Holding Gold Back
You’ve often heard me say that gold’s biggest gains are normally made when investors are worried about either the stock market, the economy or the geopolitical outlook. Right now, all three of those outlooks are in serious question. Why, then, has gold failed to respond to the heightened fears?
That’s the question gold investors are asking more than any other at present. The answer, I believe, is not because of a failure in gold’s “fear factor,” but as a result of gold’s well-known currency component. The dollar’s relentless strength, in other words, has taken all the wind out of gold’s sails in the last couple of weeks.
Currencies are typically far more stable than other tradable assets like stocks and commodities, but this year has proven to be an exception. In the last three months alone, the U.S. dollar index (USD) is up 9%—an eye-popping gain for a major currency in such a short period. It has also reached its highest level since 2002 and is putting pressure on other currencies like the euro, the yen and the pound.
More to the point, the dollar’s strong performance has been too much for gold—and other metals priced in dollars—to contend with.
Investors are usually drawn to gold and silver during periods of heightened fear like the one we’re now experiencing. But when liquidation pressures in the global equity market are widespread, the dollar also tends to be in high demand until the selling pressure subsides.
Long story short, the strengthening greenback is undermining gold’s safe-haven attraction and has for now become the world’s haven asset du jour. Consequently, I expect that gold and the major metals will remain in a slump as long as the dollar is strengthening.
Strategically, the currency’s strength—along with the recent increase in broad market volatility—has pushed us into a 70% cash position in the portfolio. There are signs, however, that the stock market is trying to put in a bottom.
As we’ve discussed in recent reports, gold has historically seen its best performances in the wake of big stock market declines. (Gold’s bullish post-2008, 2018 and 2020 market crash performances are good examples of this.) With that in mind, once a stock market low has been confirmed, I anticipate the dollar index will pull back, in turn allowing gold and the other metals to rally.
On the relative strength front, lithium and titanium are among the top-performing metals right now. Stocks closely involved with the latter metal (and related pigments) have shown excellent strength versus the S&P 500, including Valhi (VHI), Chemours (CC) and Kronos Worldwide (KRO).
Lithium’s strength, meanwhile, is being driven by increasing adoption of battery electric vehicles coupled with a tightening global supply of the metal. The war between Russia and Ukraine, moreover, has accelerated the plans of developed nations to convert from fossil fuels to alternative energy which largely depend on batteries. This in turn has increased demand for battery metals like lithium, and that’s being reflected in the stocks of several leading lithium producers—one of which I’m adding to our portfolio this week (see below).
Updates
After taking 50% profit in our conservative long position in the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded broad commodity market index ETF, we were stopped out of the remainder of this position last week when the 26.90 level was violated on a closing basis. SOLD
Kronos Worldwide (KRO) is a leader in the production of titanium dioxide pigments, the world’s primary pigment for providing whiteness, brightness and opacity (used in two-thirds of all pigments). In Q1, the company reported another solid, consensus-beating quarter. Revenue of $563 million was 21% higher from a year ago, while per-share earnings of 50 cents beat estimates by 23 cents, driven by higher titanium dioxide prices. Titanium dioxide segment profit was a whopping 129% higher, due to higher selling prices and higher sales volumes. Going forward, analysts see sales rising 9% and earnings soaring 23% for 2022, which will likely prove conservative. A 5% dividend yield ties a bow on this package. Participants recently purchased a conservative position in KRO using a stop-loss slightly under 14.75 on a closing basis. I now recommend raising the stop to slightly under 15.10. BUY A HALF
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. Management is sanguine about the year-ahead outlook, with plans to generate even more “robust” free cash flow in the coming months while paying down debt and solidifying its capital structure. The company also recently declared a 45-cent per share quarterly dividend (4% yield). 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 44 (closing basis) where the 50-day line comes into play. HOLD A HALF
New Positions
SFL Corp. (SFL) is one of the world’s largest ship owning companies, with investments in the tanker, dry bulk, container and offshore segments and boasting a significant charter backlog. Its cargos include iron ore and metallurgical coal, and the outlook for this segment is bullish as increased trade volumes and potential effects from continued port congestion are expected to absorb fleet capacity, while few newbuild deliveries are scheduled in the second half of 2022. In Q1, operating revenue of $152 million was slightly above the year-ago level and beat estimates by 10%. Per-share earnings of 37 cents, meanwhile, beat estimates by 13 cents. The company has a strong cash position and expects to continue building its business platform through new asset acquisitions and investments in order to enhance cash flows and maintain its generous dividend payouts (8% yield). Traders can purchase a conservative position in SFL using a level slightly under 9.70 as the initial stop-loss on a closing basis. BUY A HALF
Sociedad Química y Minera de Chile (SQM) is a Chilean supplier of fertilizers, iodine, lithium and industrial chemicals. It’s also the world’s fourth-largest lithium producer by market cap and holds a 19% share of the global market for lithium and lithium derivatives. Lithium supply was unable to keep pace with demand in 2021, a trend that SQM’s management expects to continue this year. Additionally, the company is in the midst of a capacity expansion (up to 180,000 tons, and with plans to spend $900,000 this year) which SQM believes will allow it to increase its market share in 2022. In Q4, SQM’s net profit surged by nearly five times, to $322 million, from the year-ago period, while revenue doubled to just over $1 billion. The company also said global lithium demand grew around 55% during 2021 from 2020, driven mostly by new demand for electric vehicles. For the first quarter of 2022, analysts expect revenue to increase 180% to around $1.5 billion (up 35% sequentially). The Q1 report is expected within the next week. Participants can buy a conservative position in SQM using a level slightly under 73 as the initial stop-loss on a closing basis. BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price on 5/16/22 | Profit | Rating |
| Invesco Commodity Tracker (DBC) | -- | -- | -- | -- | Sold |
| Kronos Worldwide (KRO) | 15.25 | 4/12/22 | 15.6 | 2% | Buy a Half |
| Natural Resource Partners (NRP) | 34.75 | 1/16/22 | 49 | 41% | Hold a Half |
| SFL Corporation (SFL) | 10.9 | 5/17/22 | 10.9 | 0% | Buy a Half |
| Sociedad Química y Minera (SQM) | 83.5 | 5/17/22 | 83.5 | 0% | 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%.