March 3, 2022

Markets had held up pretty well—weathering inflation and interest rate worries—until the last week of February, when Russia’s Putin decided to invade Ukraine. That radical move sent the markets roiling with some pretty hefty drops and increased volatility. But action today was impressive, with the Dow Jones Industrial Average up almost 600 points, the S&P 500 up 80, and the Nasdaq up 219.

Market Overview

Markets had held up pretty well—weathering inflation and interest rate worries—until the last week of February, when Russia’s Putin decided to invade Ukraine. That radical move sent the markets roiling with some pretty hefty drops and increased volatility. But action today was impressive, with the Dow Jones Industrial Average up almost 600 points, the S&P 500 up 80, and the Nasdaq up 219.

Nevertheless, we’re still down for the year, and most sectors are in the red year to date. The only positive sector is Energy, up 28.5%. The worst sectors are Consumer Discretionary (down 14.9%), Technology (-13.2%), and Real Estate (-13.2%).

Oil prices zoomed over $100 a barrel, topping $111 today. But all is not bad news. With these market gyrations, some soothsayers are thinking that the Fed may go easier on the estimated rate hikes for 2022, if we can read between the lines of Fed Chairman Powell telling the Financial Services Committee, “We will proceed carefully as we learn more about the implications of the Ukraine war.”

Also, earnings continue to be very positive. According to FactSet, in the fourth quarter of 2021 (with 95% of S&P 500 companies reporting actual results), 76% of S&P 500 companies reported a positive EPS surprise and 78% reported a positive revenue surprise. Eight sectors posted increases in their earnings growth rate since the end of the quarter, led by the Consumer Discretionary (to 48.5% from 0.4%), Health Care (to 27.1% from 17.4%), Information Technology (to 22.4% from 14.6%), and Financials (to 6.0% from -1.1%).

And historically, earnings lead stock prices, so that continues to be a positive omen for the markets. What we know for sure right now is volatility is here, along with rising inflation and interest rates on the move up, albeit maybe at a slower pace than expected. And while most investors fear volatility, uncertain times can also lead to some pretty amazing opportunities to buy low and sell high.

In the meantime, I’ll continue to bring you some ideas to help you navigate these volatile markets, introducing investments in sectors that will benefit from the supply/demand issues around the globe.

And that includes this month’s pick, a pure-play exchange-traded note (ETN) that is profiting from the high demand/low supply of tin leading to rising tin prices.

Featured Recommendation

iPath Bloomberg Tin Subindex Total Return ETN (JJT)—The Pure-Play Entrée to the Booming Tin Market
This month, I am recommending an exchange-traded note (ETN), initially picked by Clif Droke, Chief Analyst of Cabot’s SX Gold & Metals Advisor. The ETN is the iPath Bloomberg Tin Subindex Total Return ETN (JJT), which was last year’s top-performing ETN/ETF.

Here is Clif’s take on the ETN:

Tin prices have increased 14% since the start of 2022.

Tin inventories at London Metal Exchange (LME) warehouses were recently 2,360 tons, which is above last November’s record low of 887 tons but well under the 2020 average of 5,000 tons. Consequently, the tin story continues to be one driven by tight inventories and supply bottlenecks.

Measures to curb the coronavirus in Myanmar (the world’s number six tin producer) have resulted in widespread shipment delays, in turn cutting tin concentrate shipments to top producer China by roughly half. (China relied on Myanmar for more than 90% of its tin concentrate imports in 2020.)

Elsewhere, the world’s third-largest refined tin producer, Malaysia Smelting Group, which had temporarily suspended contract deliveries since last June based on a major virus outbreak, has lifted “force majeure” as of late December due to an improvement in its Covid situation. The extended production downturn, however, has put a strain on the global tin supply situation that will likely take months to completely recover from.

While solder accounts for almost half of global tin use, the metal is seeing a growing number of applications in the electrical vehicle (EV) and electronics spaces. Tin has been called “the glue” of the Internet of Things (IoT) due to its use as a solder in electronics manufacturing and packaging. Yet tin is being increasingly used in lithium-ion batteries that power EVs.

The International Tin Association estimates that 60,000 tons of tin demand is attributable to the EV industry alone. Tin producer Alphamin Resources said that at an annual growth rate of between 2% to 3%, an additional 9,000 ton increase in tin demand will result.

“We could see the tin price higher over the next two to four years,” Alphamin’s CEO Martiz Smith told the Financial Mail.

Tin is in very high demand right now for its use in coating steel and other applications. And prices have just been relentlessly rising—but in a fairly controlled fashion (i.e., not parabolic). This leads me to believe the tin bull market still has legs. I recently placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy after the improvement in the tin price following a brief stumble in December.

On a related note, according to Cabot ETF Strategist Chief Analyst, Kate Stalter, the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT), which recently gave us another buy signal, was one of last year’s top-five best performing ETFs, which you can read more about here.

Keep in mind this is an exchange-traded note (ETN), not a traditional ETF. An ETN is an unsecured debt note that trades more like a bond than a stock (more on ETNs at the end of this excerpt).

I recommend buying a conservative position in this tin-tracking vehicle. I also suggest using an initial stop-loss slightly under the 118.30 level on an intraday basis for this trading position.

From Nancy; more on JJT:

JJT is an exchange-traded note that offers pure-play exposure to tin. As Clif noted, tin is widely used in a number of industrial applications and its value tends to increase during periods of global economic strength.

JJT tracks an index that provides exposure to tin. It tracks futures contracts that roll into every other contract. When selected, each contract has about two months of remaining maturity and it is held until shortly before expiration. The contract included is the Refined Tin contract that is traded on the LME. Because the note tracks futures, it will not exactly follow the spot price of tin, but it will come close.

More on ETNs:

Unlike an exchange-traded fund (ETF), which is an independent pool of securities, an ETN is similar to a bond issued by a large bank or other financial institution, except it doesn’t have interest payments. Instead, a company promises to pay its ETN holders the return on an index over a certain period of time, and then at maturity, returns the principal, minus any fees. ETNs are traded on the major stock exchanges, like stocks.

JJT’s Trailing Returns:
Trailing Returns
YTD 72.39%
1-Month 2.79%
3-Month 29.60%
1-Year 108.86%
3-Year 23.29%

About the Analyst

Clif Droke is a growth stocks and metals investing expert and Chief Analyst of SX Gold & Metals Advisor. He brings more than 25 years of experience analyzing and writing about the gold market to Sector Express. Clif was the editor of the Gold Strategies Review newsletter from 1998 until 2020.

His approach to covering metals and mining stocks combines both fundamental and technical analysis, and he is known for developing a new-highs-and-lows-based momentum indicator used for generating trading signals in gold mining stocks. He has also authored several books on technical market trading, including How to Trade Gold & Gold Stocks.

I was an avid reader of Clif’s previous newsletter, and often excerpted his investment picks in my Wall Street’s Digest publication. Consequently, I was excited to hear that Cabot Wealth had added him to our team.

With the markets so volatile and inflation rising these days, I thought delving into the metal industry—where some sectors are often considered as inflation hedges—might be a great addition to these pages. So, I went to the expert and asked Clif to share his knowledge of the metals markets. Here is our interview:

Nancy: How does economic growth around the world affect metal prices?

Clif: Metals prices can sometimes decline even when economies worldwide are expanding. But the typical rule of thumb is that global growth benefits industrial metal demand and pushes prices higher. Copper is perhaps the best example of this, as a strong economy in the major manufacturing countries like China tends to boost copper prices.

For precious metals that have an industrial component, like platinum and palladium, economic growth tends to benefit them and push their prices higher. Gold is an exception, as the yellow metal can often remain depressed during periods of economic growth (e.g., the 1980s through the 1990s), although runaway inflation definitely benefits gold.

Nancy: How is the future of the industry dependent on politics?

Clif: Politics plays a fairly important role in gold, since central banks are involved and can tilt the supply/demand balance to a certain extent. Moreover, gold is the ultimate “tell-tale” metal in the sense that it uncovers how big of a problem inflation really is. This means that governments have a vested interest sometimes in doing what they can to artificially suppress gold prices so that the metal doesn’t “tell” on them (i.e., reveal the extent of their money printing operations). So, politics can intervene in that regard in the gold market. But I should add that gold prices can only be artificially suppressed for so long before the dominant market forces of supply and demand manifest and take their toll on prices.

Nancy: Do China and India still drive gold prices?

Clif: Somewhat, since both countries have a growing middle class and are both known as voracious gold jewelry consumers. But it should also be noted that gold was also a favored form of money storage for countries like China for many years, since the banking system wasn’t always trusted by the people. I believe that has changed in recent years as the public develops greater trust for their domestic financial institutions. I’m inclined to say that gold today is more driven by secular inflation pressures than Asian consumer demand.

Nancy: How do electric vehicles (EVs) fit into certain metal demand/supply equations?

Clif: For EVs, lithium, nickel and copper are key metals. All three are used heavily in electric vehicle batteries and are thus known as “battery metals.” Copper is also used in EV electrical wiring, motors, charting stations and other applications, so EVs have a fairly heavy copper component across the board. Right now, lithium is in very high demand globally, and with environmental restrictions on new lithium mining, that particular metal has a huge EV-related demand boost that should benefit prices going forward.

Nancy: Where do you see the metals sector in 5 years?

Clif: I fervently believe we’ve begun a new long-term inflation cycle. Based on my cycle work, the old deflationary cycle we lived through in the ‘90s and 2000s ended around 2014. And while it took a few years for inflation to really get established, there’s no denying that inflation is likely with us for a while. Also, the long-term cycle I follow is fairly consistent with the 50-to-60-year Kondratieff cycle, or K-wave. With that in mind, I see metals prices categorically (precious and industrial metals) continuing to trend higher for the next five years and even longer.

Nancy: What are the top three reasons why you’re currently interested in the metals?

Clif: Metals interest me because they represent excellent stores of value that are always in high demand, regardless of the economic climate. This is particularly true of precious metals like gold and silver. But as we’re seeing now, it also holds true for base metals like copper, aluminum and steel, which are in high demand during the worldwide manufacturing rebound since the 2020 shutdown.

Metals prices are cyclical and can run hot and cold, but when they’re “hot” like they are now, metals and metal stocks represent one of the best forms of financial market profits due to the huge percentage gains they can make in relatively short periods (during bull markets). Finally, metals are essential to the smooth functioning of the economy and will never go out of style. So, for that reason alone, having exposure to metals can be considered a long-term venture for an individual investor.

Nancy: Which sectors of the metals industry are the most appealing to you?

Clif: I find the rare earths intriguing. They’ve provided some excellent short-term profit opportunities in the last couple of years, and I expect to see more opportunities in the year ahead from the rare earths, due to their strategic importance to a great number of industries. Also, lead and zinc mining is an under-the-radar area that I keep a close watch on. There are some stocks in this segment of the mining sector that are actively traded and can really pop when those two metals are in high demand. And they have the added benefit of not being over-traded.

Nancy: What are the most critical challenges to growth in the metals sector right now?

Clif: As I mentioned, for lithium, the major challenge is environmental regulations. Too many state, local and federal governments around the world (including in the U.S.) are restricting lithium mining at a time when that metal is in great demand. In fact, the environmental regulatory threat can be applied to almost any form of metal mining—not just lithium. So, that’s definitely a challenging going forward.

Another challenge is the global supply chain, which, as you know, is still a problem to some degree, as pandemic-related bottlenecks still exist. And if the war involving Russia and Ukraine accelerates, shortages for metals like copper, steel and aluminum will likely become a major issue.

Nancy: Clif, just a couple more questions about gold. Does it make sense for an investor to buy gold bullion, or should he stick with ETFs, funds, or individual stocks?

Clif: I’ve long been an advocate of using actively traded ETFs in lieu of owning physical gold. I’m not opposed to owning physical gold coins, ingots and bars, but the problem becomes one of storage. What if your house is broken into? What if it catches fire and you can’t get the gold out? And there are obviously storage costs involved in using a bullion bank vault (and let’s face it, there may even be political risks in using a bank vault depending on one’s country).

ETFs are generally safe and can be bought and sold instantaneously. And for the skeptics who say, “Well what if the stock exchanges shut down during a national emergency or crisis and you can’t access your account?” I’d respond, “In a national emergency, you’ll likely have just as many problems trying to sell your physical gold as accessing your brokerage account.”

Nancy: How risky are junior mining stocks?

Clif: Junior mining and exploration stocks definitely carry an above-normal degree of risks. I tend to favor well-established, mid-tier and senior mining companies when I’m bullish on gold and silver. Junior miners can have some extraordinary rallies from time to time—especially in a bullish gold environment. But because those companies aren’t established, traders have a tendency to quickly take profits and dump shares once the stock’s price has had a sizable rally. There’s nothing wrong with taking an occasional swing in a nice-looking junior mining stock, but my advice to most traders and investors is to steer clear of this area unless you plan to specialize in it.

Portfolio and Industry Update

Tin Industry Update
From January to November 2021, tin prices rose from $21,920 per ton to $39,159 per ton, reaching the highest level ever, according to a new report by a market research firm IndexBox. As I write this, the price is now more than $45,000.

The catalyst, as Clif noted, is rising demand in a tight supply market. In fact, global supply of tin has stagnated over the past 10 years, while demand has reached new highs.

Increased usage from electronics, expensive freight rates, and the limitation of metal smelting in China (as a result of environmental regulations) have all booted tin prices. But it is the rising demand that is the largest catalyst.

Automakers use tin for coatings, bearings, brake pads and batteries. Tin is also a big component of solar photovoltaic cells, with solder used to join solar cells. Semiconductors are also major tin consumers, and we all know that the supply of semiconductors has been stymied, due to the coronavirus pandemic, which has boosted demand (and prices) in that arena. Additionally, tin is used to coat other metals to prevent corrosion, such as in tin cans, superconducting magnets, window glass, sensors, and coatings.

The chart below will give you an idea of the multi-faceted usages for tin.

With all of this demand, it’s no surprise that, in 2021, tin prices experienced their highest rise since trading in tin was relaunched in 1989, four years after the collapse of the International Tin Council forced a suspension.

The global tin market is worth about $5.7 billion. The leading consumer of tin is China (181K tons), comprising about 48% of the total volume, followed by the U.S. (30K tons), and Japan (20K tons). As I mentioned, one of the largest users of tin is the auto market, led by China. In the first three quarters of 2021, China manufactured 18.24 million automobiles, up from 16.96 million in 2020, which increased consumption of many auto parts that are made from tin.

Here are the world’s top refined tin producers:

Indonesia is the world’s top tin exporter, disbursing about 70,000 tons, or 35% of total tin exports across the globe. Peru is in second place (11%), followed by Malaysia (10%), Singapore (8.5%), Bolivia (5.5%), Belgium (5.4%) and Brazil (4.7%).

Geography (Market Size by Volume)

The tin market size was estimated at over 387 kilotons in 2021 and is estimated to grow at an annual rate of 2.5% from 2022-2027.

As demand for tin continues to rise, so should the price. Consequently, now may be the perfect time to take advantage of those price increases by buying into the iPath Bloomberg Tin Subindex Total Return ETN (JJT).

The next Cabot Money Club Stock of the Month issue will be published on April 14, 2021.