Metals Show Encouraging Relative Strength
In last week’s newsletter, we discussed the case for future inflation being already priced into commodity prices. I also addressed the possibility that something might happen to unexpectedly reverse the trend of higher consumer prices, suggesting that China’s debt crisis as a likely culprit. And while China is still high on my list of possible trend reversal triggers, the latest broad market sell-off has provided an even more likely catalyst: public health worries.
Widespread concerns over the spread of a new coronavirus variant prompted a rush to the sidelines on Friday’s holiday-abbreviated trading session. Risk aversion was clearly in evidence as U.S. equities plunged by an average of 2%, while commodities were down around 6%—led by a 15% plunge in the crude oil price.
Gold fared better, initially rising 1% in the wake of the selling pressure but eventually settling unchanged for the day. The yellow metal’s show of relative strength was nonetheless an encouraging sign that gold is still the preferred vehicle for safety-oriented investors; indeed, gold even outperformed the dollar, which retreated sharply. And in a further demonstration that bitcoin hasn’t supplanted gold as a safe haven, cryptocurrencies were down between 3% and 4% on the November 26 session.
Indeed, sometimes a single day’s trading is all that’s needed to show just how much safety demand exists for the major defensive assets. But what was even more surprising than gold’s relatively strong showing in the face of the latest virus concerns was how well the other major industrial metals performed.
Although economically hyper-sensitive metals like steel, copper and platinum were (unsurprisingly) hit by selling pressure when news of the Omicron variant rippled through the market, the stock prices of companies that produce other key metals remained relatively unfazed by the selling pressure. Aluminum, lithium, cobalt and rare earth stocks are among those that have lately remained buoyant in the face of unwelcome news, showing impressive relative strength.
This showing of strength suggests that while inflation may not be a bullish factor for the overall metals market in the near term, prices for base and precious metals—and the companies that produce them—will probably remain high in the foreseeable future. And the main driver for broad metal market strength is likely to be continued high demand for electric vehicles and other alternative technologies that rely on such metals as critical inputs.
In the portfolio, while I’m mostly encouraged by the recent action of the leading metals and mining stocks, we have one change to make as our gold ETF sell-stop was unfortunately triggered by last week’s volatility. I’m also adding an intriguing precious metals player to our buy list.
Updates
With tin remaining in a position of strength, I recently placed Alphamin Resources (AFMJF) on a buy. Mauritius-based Alphamin explores and develops mineral properties and is a low-cost producer of tin concentrate from its high-grade deposit, Mpama North, part of the Bisie Tin Project in the Democratic Republic of Congo. (Mpama North is the world’s highest-grade tin resource—about four times higher than most other operating tin mines in the world—allowing Alphamin to produce 3% of tin produced globally.) Alphamin also mines and sells tin from its North Kivu mine, producing nearly 10,000 tons of tin annually. While Alphamin is recognized as a promising tin producer, it flies largely under the radar among mining stock analysts right now. Participants purchased conservative position in AFMJF on October 7 using a level slightly under 58 cents as the initial stop-loss. I also previously suggested taking a bit of profit earlier this month after the stock’s 21% rally and raising the stop to slightly under 65 cents. I now suggest further raising the stop to slightly under 72 cents (near the 50-day line). HOLD
On the uranium front, a key player showing promise from an intermediate-term standpoint is Denison Mines (DNN), a Canada-based uranium exploration, development and production company. Denison’s flagship project is Wheeler River, which has two high-grade uranium deposits, Phoenix and Gryphon. Phoenix is believed to possess the lowest production costs of any undeveloped uranium deposit, with all-in sustaining costs of $8.90 per pound (compared with current prices of around $32) and operating costs of just $3.33 per pound. All-in sustaining costs for Gryphon, meanwhile, are also a below-market $22.82 per pound, with a combined 109 pounds of probable reserves and a 14-year mine life. Additionally, Denison recently agreed to acquire a 50% stake in the JCU Exploration Company from UEX Corp. JCU holds a portfolio of 12 uranium project joint venture interests in Canada, and the acquisition is expected to allow Denison to not only increase its indirect ownership of its flagship Wheeler River project, but also to expand its asset base to include additional important Canadian uranium development projects such as Millennium and Kiggavik. Denison is admittedly speculative, but with physical uranium supplies getting tighter, the stock looks to be in a position to continue a turnaround that began last year. Investors purchased a conservative position in DNN in October with a level around 1.40 as the initial stop-loss. After the recent 15% rally, I also advised taking some profit and raising the stop on the remaining position to slightly under 1.50 on a closing basis. HOLD
We were stopped out of our latest trading position in the GraniteShares Gold Trust (BAR), our favorite gold-tracking vehicle, on November 26 when our stop slightly under the 17.75 level was triggered. This took us out of our position at essentially break-even before BAR reached my 19 upside target. Assuming gold quickly firms up and turns up again, we could soon get another buy signal given the metal’s strength relative to other major metals. But for now, I recommend waiting for market conditions to improve. SOLD
We recently added Haynes International (HAYN), a leading developer and manufacturer of technically advanced nickel- and cobalt-based alloys used in corrosion-resistant and high-temperature applications (including aerospace, chemical processing, industrial gas turbines and other industries). Haynes’ stock price tends to track nickel prices (albeit loosely), but the firm is also involved with other metals, including chromium, molybdenum, tungsten, aluminum and titanium. The stock’s 2.1% dividend yield is an additional attraction. Investors purchased a conservative position in HAYN using an initial stop-loss slightly below the 41.35 level on a closing basis. BUY A HALF
Livent Corp. (LTHM) is the largest U.S. lithium-only miner, providing a range of lithium-based products and serving the EV, chemical, aerospace and pharmaceutical industries. Revenue and earnings projections for Livent are strongly optimistic for the next several years, with analysts expecting top-line growth of 34% this year and around 20% next year, while earnings are projected to grow at an even faster pace. Participants on October 13 bought a conservative position in LTHM using a level slightly under 22.25 as the initial stop-loss. After rallying 21% since then, I recommend taking some profit in LTHM and raising the stop-loss on the remaining position to slightly under 28 on a closing basis. HOLD
Lynas Corp. (LYSCF) is a rare earth mining company based in Australia and boasting one of the highest-grade rare earth mines in the world. Lynas is also the only producer of scale of separated rare earths outside of China, and it also operates the world’s largest single rare earths processing plant (in Malaysia). Among the rare earth oxides it produces are neodymium and praseodymium (NdPr), lanthanum, cerium and other mixed heavy rare earths. With the global rare earth supply chain being threatened by mining bans around the world, Lynas is poised to benefit from increasing demand for the key industrial elements it mines (particularly those used in magnets). Participants recently bought a conservative position in LYSCF using a level slightly under 5.25 (near the 50-day line) as the initial stop-loss on a closing basis. BUY A HALF
Ryerson Holding (RYI) is a value-added distributor and processor of industrial metals, including stainless steel, aluminum, carbon and alloys. Most of its customers operate in the metals fabrication with exposure to electric vehicles, e-commerce logistics, automation and other industries. Aside from being an indirect play on the steel industry, Ryerson is also an infrastructure spending play. Investors purchased a conservative position in RYI on November 2, using a level slightly under 23 as the initial stop-loss on a closing basis. I recommend raising the stop to slightly under 24 after the latest rally (near the 50-day line). BUY A HALF
Traders recently purchased a conservative position in the United States Copper Index Fund (CPER) using a level slightly under 25.60 (the nearest pivotal low) as the initial stop-loss on an intraday basis. Let’s maintain this stop for now. BUY A HALF
New Positions
It’s not a gold miner, but A-Mark Precious Metals (AMRK) belongs on any list of the top-performing gold-related companies. A-Mark is a precious metals trading firm which offers physical precious metals coins and bars online and via brick-and-mortar locations. Unlike most gold mining companies, A-Mark typically makes more money when gold and silver prices are volatile—a fact that is demonstrated by its excellent stock price performance in recent months. A-Mark has been described as a “cash cow,” and in its fiscal Q1 2022 earnings the firm reported an 8% revenue increase from a year ago, to $2.1 billion. Gross profit for the latest quarter increased 55% to $56 million, while gross profit margin increased to 3% of revenue. Per-share earnings of $2.17, meanwhile, obliterated the consensus by 80 cents. Management noted that positive macro tailwinds persist, including precious metals supply constraints and elevated demand for precious metals products in both the retail and wholesale segments, further guiding for profits in stable periods and “opportunities for outsized returns in periods of volatility” going forward. Looking ahead, analysts foresee continued top-line growth for A-Mark and forecast 22% higher revenues and 23% higher earnings in fiscal Q2. Participants can buy a conservative position in AMRK near current levels, using a level slightly under 65 as the initial stop-loss. BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price 11/30/21 | Profit | Rating |
| Alphamin Resources (AFMJF) | 0.73 | 10/8/21 | 0.73 | 0% | Hold |
| A-Mark Precious Metals (AMRK) | New Buy | - | - | - | Buy a Half |
| Dennison Mines (DNN) | 1.65 | 10/19/21 | 1.60 | -3% | Hold |
| GraniteShares Gold Trust (BAR) | - | - | - | - | Sold |
| Haynes International (HAYN) | 44 | 11/23/21 | 41 | -6% | Buy a Half |
| Livent Corp. (LTHM) | 26 | 10/13/21 | 31 | 21% | Hold |
| Lynas Corp. (LYSCF) | 5.85 | 11/16/21 | 6.27 | 7% | Buy a Half |
| Ryerson Holding (RYI) | 26 | 11/2/21 | 25 | -6% | Buy a Half |
| United States Copper Fund (CPER) | 27 | 11/23/21 | 27 | -1% | 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%.