A Needed Pullback for the Metals
Base and precious metals have had an extraordinary upside run so far this spring, with industrial metals outperforming gold and silver for the most part. Yet even the strongest markets need a well-deserved rest every now and then, and now appears to be one of those times.
Led by an 8% pullback in the palladium price, several metals have experienced similar declines lately as an overheated, and somewhat overbought, market environment enters a cooling-off phase.
Among the metals suffering declines in recent days: Copper is down 5%, aluminum is down 6%, platinum is down 7% and steel is down 12%.
However, the main precious metals—gold and silver—have outperformed of late. Silver is down just 3% as of May 21, while gold hasn’t declined at all as of this writing.
As we’ll discuss here, both precious metals are still benefiting from a combination of increased economy-related fears among investors (including the inflation/weak dollar narrative), as well as geopolitical concerns (specifically, recent Middle East tensions).
I’ll make the case in this report that more than any other factor, the persistence of fear is likely to keep gold prices buoyant in the coming months, with silver (hopefully) tagging along for the ride.
Feature Story: How Inflation Fears Fuel a Gold Bull Market
Oh, inflation! How do I fear thee? Let me count the ways.
While the above is a corruption of the original sentiment expressed by the famous poet Elizabeth Barrett Browning, there’s no denying it captures what most investors are feeling right now. Inflation has gone from being a distant specter that our parents and grandparents talked about to a very real and immediate threat.
Prices ranging from oil to lumber to retail food have all increased dramatically in the last year since multi-trillion-dollar stimulus packages were provided to support an economy weakened by virus-related shutdowns. And now those stimulus “chickens” have come home to roost.
But not every segment of the economy is experiencing the same level of inflation. Indeed, some industries have been relatively immune to its ravages thus far. But it’s the industries that have been the most responsive to inflation that are capturing all the headlines.
One of the biggest beneficiaries of commodity price inflation is the housing industry, which has added around $36,000 to the cost of the average new home in the U.S. (due mainly to sky-high lumber prices). Soaring home prices have even prompted some investors to ask the question posed in a recent MarketWatch article headline: “Should I sell my stocks so I can pay cash for a house?”
But as I continue to argue here, it’s not inflation that’s benefiting gold right now. It’s the fear of additional increases in the inflation rate that’s primarily boosting gold prices. More specifically, fear itself is driving gold—and that has always been the case due to the metal’s traditional role as a safe haven against economic uncertainty.
Fear has been the missing ingredient since last summer, when the gold price peaked. It was at that time that widespread worries over the coronavirus began to wane as the cold and flu season ended, buoyed by a massive rally in equity prices and a deceleration in the U.S. dollar’s decline.
Last summer was also when the U.S. 10-year Treasury Yield Index (TNX) bottomed out and began what was to be a 250% rally through the months that followed. (Increasing confidence in the economic recovery was the catalyst for the TNX rebound.)
It can be argued that the rise in Treasury yields, probably more than any single factor, undermined gold’s attraction as a haven investment. For gold, which doesn’t offer a yield, was then forced to compete with ever-higher bond yields—and the outcome was a “no contest” as yield quickly won out over safety considerations. Gold was quickly shunted to the sidelines as yield-seeking investors chased rising yields, and it wasn’t until the recent TNX peak in March that investors began showing interest in gold.
Now that gold is once again on the upswing, it’s important that we maintain a running checklist of factors that could keep its “fear factor” going. Without fear, gold has a hard time keeping investors’ collective attention, so if you’re a gold investor, it’s imperative that there’s a plentitude of worries to support bullion demand.
A cursory glance at the headlines yields the following list of worries that will likely act to support gold in the intermediate term: Inflation/weak dollar, cryptocurrency weakness, stock market “bubble” worries, Middle East unrest and the staying power of the global economic recovery. This is admittedly a short list, but I believe the fears reflected here are more than sufficient to provide a supporting bid for gold in the coming months.
Above all, it’s the ubiquity of inflation fears that will likely serve as gold’s key support. Until recently, inflation was mainly a rumor that was talked about in only certain quarters of the financial media. Now that it’s mainstream news, those fears will likely override every other worry on the list and inspire investors to add gold to their portfolios as an inflation hedge.
What To Do Now
We recently purchased a conservative position in the iShares Gold Trust (IAU), my preferred gold-tracking vehicle of choice (and the most actively traded of the U.S. exchange-listed gold ETFs). IAU has rallied persistently for most of May as fears over inflation widened. The safety trade in gold has been activated for reasons discussed previously, and I’m expecting a fairly vibrant gold market this summer—unless those fears are significantly allayed (mainly in the form of falling oil prices). I suggest raising the stop-loss on this position to slightly under the 17.09 level near where the 25-day line’s presence is felt. (As a rule, you should generally avoid using round numbers when initiating protective stop orders due to the tendency for stop orders to build up at these levels, hence contributing to a “running of the stops” by large speculators.) BUY UNDER 17.60
New Recommendations/ Updates
As is normally the case in a strong-and-stable gold bull market, mining shares tend to outperform the bullion price itself. The leverage factor for mining stocks is well established, with actively traded mid-tier and senior miners often outperforming gold by a factor of 2-to-1 or even 3-to-1 on average. (It’s not uncommon for junior mining stocks to outperform gold by an even greater factor.)
Barrick Gold (GOLD)
In the inaugural issue I stated my high hopes for Barrick Gold (GOLD), the world’s second-largest gold mining company, since the firm is well positioned to benefit from the gold turnaround now underway. Barrick forecasts all-in sustaining costs (a measure of how cheaply a firm can mine gold) at around $929 per ounce as of last year’s fourth quarter—well below current prices of around $1,867 per ounce—and giving the firm plenty of room to take on additional projects. Barrick shares have rallied 8% since our initial recommendation, and I previously suggested taking partial profits. (One of the rules of my technical trading discipline requires taking partial profits whenever a trading position is at least 8% to 10% higher from the initial entry point in order to lock in some of the gains regardless of what happens next. The rest of the position I let ride.) For now, I also suggest raising the protective stop-loss on the remainder of the trading position to slightly below the 23 level. HOLD
Barrick forecasts all-in sustaining costs (a measure of how cheaply a firm can mine gold) at around $929 per ounce as of last year’s fourth quarter—well below current prices of around $1,833 per ounce—and giving the firm plenty of room to take on additional projects. Consequently, analysts are predicting even more top- and bottom-line growth in the first half of 2021.
The company is also disposing of non-core assets, rapidly paring its long-term debt and has announced a 10-year plan to become the world’s most valued bullion company. All told, Barrick has every reason to be optimistic about its future.
Newmont Mining (NEM)
It typically pays to own the mining stocks with superior relative strength (versus the XAU mining index and the S&P 500), and Newmont Mining (NEM) is the cream of the crop on this score. As previously pointed out, Newmont has been a leader in the present gold mining stock rally, having been the first of the senior miners to achieve new highs for the year in April. And it’s not only in a strong technical position, but in a solid fundamental position as well. For 2021, analysts expect Newmont’s top line to increase 15% from a year ago, while the bottom line is predicted to rise 33%. It’s a solid mining story and I believe Newmont stock should be a part of every long-term precious metals portfolio. After the 10% rally from our initial recommendation, I previously suggested that traders take partial profits and raise the stop on the remainder of the trading position. Suggested stop-loss for now is slightly under the 67.50 level (our original entry point). HOLD
Silver More Than Just ‘Poor Man’s Metal’
Silver is sometimes derided as the “poor man’s gold,” yet its many industrial functions attest to its inherent—and increasing—value.
Aside from being the most conductive metal in the world, silver is also a major component in most of today’s electronic applications, including consumer and automotive electronics, microelectronic systems, LED lighting, semiconductors and power distribution components. An increasingly connected world will necessitate greater amounts of electrification, of which silver will play a pivotal role.
That role continues to expand, as data from the latest Silver Institute survey showed. According to The Silver Institute (TSI), “Silver demand for printed and flexible electronics is forecast to increase 54 percent, from 48 million ounces (Moz) in 2021 to 74 Moz in 2030, consuming 615 million ounces for these applications through 2030, as this market continues to mature and expand.”
Global industrial silver production, moreover, is expected to grow 8% this year due to strong demand for consumer electronics and solar systems. Citing data from Metal Focus, TSI forecast a silver price peak at $32 per ounce later this year, while its average price is expected to increase 33% from last year (to $27.30). [Emphasis mine]
Mine production is also predicted to increase 8% in 2021 as output recovers after last year’s shutdown-related closures, which led to a 6% decline in global silver supply in 2020. “This forecast pick-up in demand is predicated on a recovery in vehicle manufacturing, strong consumer electronics demand, and further gains from the solar sector,” TSI said.
Meanwhile, jewelry and silverware demand are expected to see double-digit gains in 2021, according to the survey.
While I typically avoid making specific price target predictions (preferring instead to focus on price direction rather than magnitude), I can’t disagree with TSI’s conservative price prediction for silver for 2021. But more importantly, I think we should focus on what is likely to be the main driver for a silver bull market.
Ideally, the silver price should lead the gold price in an extended rally phase for both metals. That wasn’t the case in March, as the following graph shows. This compares the price lines for the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV), my favorite proxies for each metal. As you can see, while the gold ETF (red line) bottomed on March 8, the silver ETF (blue line) lagged the gold price by several weeks and didn’t bottom until the last day of April.
My interpretation of this divergence is that gold showed relative strength versus silver because the market was getting worried (for all the reasons mentioned earlier in this report), thus investors started buying safe-haven positions in gold and gold ETFs. Had gold’s latest bull run been predicated on greed, or speculative fervor, then it’s almost certain that silver would have led the rally (silver being the more speculative of the two metals due to its much lower price and, at times, greater volatility).
The fact that silver lagged gold earlier this spring isn’t necessarily an indictment on the strength of gold’s upward trend. What it likely means is that the speculative element isn’t yet dominant in the overall precious metals market. And if this is in fact the early stages of an extended bull market (as I believe it to be), that’s a good thing. For the longer speculators stay out of the market, the easier it will be for serious-minded investors trying to build up a suitable position in both metals.
The most important takeaway from this comparative analysis of gold and silver is that now that both metals are in sync with each other, the negative divergence that occurred in March is no longer an issue. Indeed, the strongest bull markets happen when the prices for both metals are more or less aligned with each other. And as long as this remains the case, I think participants are justified in following the dominant short-term trend
What To Do Now
Aggressive investors purchased a position in the iShares Silver Trust (SLV) on May 11. This is my preferred silver-tracking vehicle of choice and is one of the most actively traded of the U.S.-listed silver ETFs. Aside from the obvious inflation factor, silver is benefiting from several major areas of industrial demand. Silver expert Frank Holmes of U.S. Global Investors recently observed that the metal should become a key beneficiary of several emerging industrial applications, including the global rollout of 5G technology, solar power generation (e.g. solar panels) and the electric vehicle and automotive sector. On a technical note, SLV hit a yearly intraday high at 28 on February 1, leaving a rather prominent “air pocket” that I expect will be eventually filled (as is normal in such cases). The pullback to date has been normal, but if this turns out to be another extended selling episode for SLV, I’m not inclined at this time to wait it out but would rather exit and find a better re-entry point once the dust has completely settled. I therefore suggest raising the stop-loss slightly under the 24.50 level (which is the current position of the 25-day moving average) on a closing basis. HOLD
Molybdenum Market Melts Up
Molybdenum is arguably one of the hottest metal markets right now. Prices for the metal, which is used primarily in steel alloys to increase strength, hardness and electrical conductivity, are up 15% in what has been a frenetic last few days of trading.
Several factors contributed to the huge run-up in the moly market, including tight inventories and above-normal consumption, shined a light on the production outlook for molybdenum.
According to FastMarkets MB, “Would-be buyers found themselves caught short or with limited offers last week after a strong first quarter gave way to slower activity in April.” The lack of molybdenum inventory is becoming a cause of concern for market participants, but is fueling a resurgence of interest in the companies that produce the metal.
One way of getting some investment exposure to molybdenum is by owning shares of Taseko Mines (TGB). Canada-based Taseko is known mainly for being a mid-tier copper miner that operates the Gibraltar Mine, Canada’s second largest open-pit copper mine.
Taseko produces more than just copper, though, and the Gibraltar mine boasts proven reserves of 53 million pounds of molybdenum. Located in south-central British Columbia, Gibraltar has an estimated 18-year mine life and is located in a mining-friendly, low-risk jurisdiction.
Total molybdenum production for the company in the first quarter of 2021 was 530 thousand pounds, up 29% from a year ago. Taseko reported that molybdenum prices strengthened in Q1 and averaged $11.32 per pound (26% higher sequentially).
Total revenue for Q1 was up 40% from a year ago (due partly to easy comparisons). But things are expected to strengthen for the firm moving further into this year. Citing improvements in copper conditions, management said it expects higher EBITDA this year.
Analysts believe Taseko can generate $115 million in positive cash flow this year if copper averages $4 per pound in 2021. Moreover, they also expect Taseko’s top line to increase 24% for 2021 on the back of higher copper and molybdenum demand and higher prices for both metals. In view of the supply shortages and increased industrial demand for steel, it’s a solid story.
What To Do Now
Investors can do some nibbling in Taseko Mines (TGB) on pullbacks down to around the 50-day line at around 1.75 (stop). BUY A HALF ON WEAKNESS
Platinum Market Losing Steam
One of the most inflation-sensitive metals is platinum due to its established reputation as both an investment-quality precious metal and its widespread industrial applications.
After recently hitting its highest level in six years and rising 100% since last March, platinum has hit a proverbial wall. Selling pressure has haunted the white metal in recent days, and a key trend line for the platinum price (discussed below) is now being tested.
There really are no conspicuous fundamental reasons for the latest weakness, as the U.S. dollar in which the metal is priced remains weak—which is typically bullish for the metal. And from a technical perspective, platinum prices have gone more or less sideways since peaking in February, so we can’t attribute the metal’s latest dip to an “overheated” market condition.
Moreover, manufacturing demand remains strong, as recent statistics have shown. In fact, global manufacturing accelerated at beginning of the second quarter, according to Markit Economics data. The monthly manufacturing purchasing managers’ index (PMI) data revealed that industrial output rose “at the fastest pace in more than a decade, as inflows of new orders showed the strongest improvement in almost 11 years.”
It’s also worth noting that the JPMorgan global manufacturing PMI increased to 55.8 in April, its highest level since April 2010. (A reading above 50 indicates an expansionary trend in the industry.)
Jewelry demand isn’t a problem, either. According to Capital.com, same-store sales growth for platinum jewelry in mainland China during this year’s first quarter leaped almost 80% from a year ago, while seeing a 63% increase in Hong Kong. (China, of course, is the world’s largest jewelry market.) Similar levels of healthy demand have historically argued strongly in favor of platinum investment among the precious metals-conscious Chinese.
So what exactly is going on with the market? I maintain that the most likely culprit behind the drooping platinum price is that the speculative element is missing from the market right now. Regardless of how strong platinum’s fundamental outlook is, the metal’s best upside runs in recent years have been largely driven by momentum-oriented large speculators looking to benefit from the ease with which prices can be driven higher whenever short interest piles up.
Short interest among managed money hasn’t been high enough of late to warrant a short squeeze, based on my interpretation of Commitments of Traders data. Commercial participants, moreover, aren’t currently expressing enough optimism in the metal’s outlook to warrant a short-covering rally. This, combined with platinum’s waning price momentum since February, is probably the simplest, if not best, explanation for the metal’s lack of responsiveness to the admittedly bullish fundamentals.
The current week is pivotal for platinum, in my view. A reversal of platinum’s price near the 120-day moving average (discussed below) would be a big positive from a market psychology perspective, and might even be a sufficient catalyst to attract renewed technical buying. But if this trend line is decisively broken, the sellers will be in a position of strength and could do further damage in the short term.
What To Do Now
We recently purchased a conservative position in the GraniteShares Platinum Shares ETF (PLTM), which is backed by the physical metal and is held in allocated bars (a daily updated bar list is posted at GraniteShares’ website at https://graniteshares.com). Platinum has lagged the recent gold and silver rally, and is now testing a key trend line. I don’t normally discuss the 120-day moving average (see chart below), but at times it has proven to be a pivotal support for platinum and platinum ETF prices. Accordingly, I recommend that we maintain our long position in PLTM and keep the stop-loss unchanged at slightly under the 11.50 level. A decisive violation of 11.50 on a closing basis would break a key chart support and would convince me that sellers have no intention of relinquishing their hold on the metal in the near term. HOLD
Copper Takes a Breather
After soaring nearly 120% since last March, reaching its highest level in over a decade, copper has taken a needed breather.
As mentioned earlier in this report, the red metal’s price has pulled back over 5% in recent days after being a bit extended from its underlying 25-day line. It’s now within kissing distance (4%, to be exact) of the psychologically significant—and widely watched—50-day moving average at the $4.31 level.
A successful reversal above the 50-day line would obviously be near-term bullish for copper and would likely invite some new speculative buying among sidelined investors. It would also keep copper’s short-term price structure intact without creating too much overhead supply/resistance for copper bulls to have to chew through on the rebound.
Details have recently emerged that regulators in China will implement controls to stop what officials have deemed as “unreasonable” price moves in the copper market. China state television reports that the nation’s Premier, Li Keqianq, held a recent meeting in which members agreed to closely monitor spot and future markets and make adjustments where necessary to diminish copper stockpiles with the putative goal of ending excess speculation.
As you can guess, the news wasn’t exactly met with enthusiasm by market participants, who sold copper and booked profits following its recent run to yearly new highs.
Christopher Vecchio, senior strategist at the DailyFX website, recently featured the following graph in one of his commentaries. It shows that the progression of refined copper demand surged to a record high in April (at 203,800 metric tons, up 57% from a year ago). During this time, the correlation between monthly Chinese refined copper demand and copper prices over the past five years has been fairly closely correlated.
This is a major fundamental reason for maintaining an optimistic intermediate-term (6-9 month) outlook on copper, along with the weak U.S. dollar and the global manufacturing rebound discussed in previous reports. Regardless of what happens in the short term, copper’s intermediate backdrop remains firm.
What To Do Now
Freeport-McMoRan (FCX) is one of the world’s top-four copper producers and is also benefiting from higher gold prices, with recent sales 9% above the company’s guidance in the fourth quarter. Management projects a copper sales increase of 20% over 2020, with gold volumes expected to rise by more than 50%—even as production remains low (projections which will likely prove conservative). The company’s quarterly dividend has also recently been reinstated, tying a nice bow on an otherwise attractive package. Last week, I suggested using a stop-loss slightly under the 39.35 level on open long positions in the stock. I’m maintaining this recommended stop-loss for now. HOLD
We were stopped out of our trading position in Teck Resources (TECK) last week when our stop-loss at slightly under the 23 level was activated. The weakness in what has been an otherwise stellar fundamental story for the company can likely be attributed to the China-related copper news mentioned above. But until we see some near-term technical improvement, no new trading positions are currently recommended in TECK. SELL
China Intervenes in the Steel Market
As mentioned in the cover letter, steel prices are down 12% from their recent highs as the red-hot market for rebar and rolled coils cools off.
One of the reasons for the weakness is that Chinese construction rebar and hot rolled coils (HRC) futures markets are under pressure as Chinese regulators clamp down on excess speculation (as they are also doing with copper right now). Steel prices roaring to highs earlier this month prompted China’s regulators to increase inspections, according to a Reuters report.
Reuters noted, however, that data also revealed that China also recorded monthly crude steel output highs in April despite the government’s efforts to encourage production cuts.
It was further noted in the press that surging steel prices have forced some construction firms on the mainland to reduce their purchases of the metal.
What’s more, regulators in Shanghai and steel hub Tangshan also warned local mills against price gouging, collusion and other forms of manipulation, which is expected to keep steel prices from rising significantly in the very near term. The negative sentiment these developments engendered are the main reason for steel’s latest weakness.
Fitch Ratings also pointed out that it expects “the rally in China’s steel price to slow in coming weeks as summer approaches, as the season tends to see lower downstream demand due to subdued construction activity.”
Nevertheless, high prices for iron ore and new environmental regulations in China should provide some underlying support for the steel market until the short-term kinks are worked out and steel prices are poised for another run higher.
What To Do Now
Cleveland-Cliffs (CLF) is one of North America’s largest integrated steel makers and is seeing higher steel demand (and higher steel prices) thanks to global economic recovery and tight supplies. Recently quarterly results provided some insights into why things are rolling for Cleveland-Cliffs, as discussed in previous issues. Since then, Bank of America has reinstated coverage of the company with a “buy” rating and an upside target of 25, referring to it as a free cash flow “machine.” I recommended that investors maintain our recently purchased conservative position in CLF provided the 18 level (our latest stop-loss) isn’t significantly violated on a closing basis. This level (which also hosts the psychologically significant 50-day line shown below) is currently being tested, so we’ll need to keep a close eye on the stock from here. HOLD
Current Portfolio
| Stock | Price Bought | Date Bought | Price on 5/24/21 | Profit | Rating |
| Barrick Gold (GOLD) | 23 | 5/11/21 | 25 | 6% | Hold |
| Cleveland-Cliffs (CLF) | 20 | 5/11/21 | 18 | -9% | Hold |
| Freeport-McMoRan (FCX) | 41 | 5/11/21 | 41 | 0% | Hold |
| GraniteShares Platinum Shares (PLTM) | 12 | 5/11/21 | 12 | -4% | Hold |
| iShares Gold Trust (IAU) | 17 | 5/11/21 | 18 | 5% | Buy |
| iShares Silver Trust (SLV) | 25 | 5/11/21 | 26 | 1% | Hold |
| Newmont Minint (NEM) | 67 | 5/11/21 | 74 | 10% | Hold |
| Teck Resources (TECK) | 24 | 5/11/21 | 23 | -4% | Sell |
| Taseko Mines (TGB) | 2 | 5/24/21 | 2 | 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%.
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