Key Industrial Metals Bottom; Is Gold Next?
Despite persistent strength in the U.S. dollar and the latest spike in Treasury yields, gold is holding firm.
Meanwhile, two of gold’s leading indicators—platinum and palladium—are strengthening and suggesting that a confirmed bottom for the yellow metal could be nigh.
Industrial metals are still choppy in the aggregate, but the intermediate outlook is improving for quite a few of them—particularly copper and steel.
This week’s featured stock pick is a play on streaking metallurgical coal prices, which are used heavily in steel production.
Feature Story: Metals’ Broad Market Improves
It hasn’t happened yet, but gold appears to be on the cusp of confirming another intermediate-term bottom based on several important considerations. We’ll discuss those positive factors here, along with some technical reasons as to why a reversal of gold’s 14-month slump could be approaching.
It has been a long, tough year for the yellow metal, with prices down 14% since hitting a peak of $2,070 an ounce in the summer of 2020. Yet gold has somehow managed to resist further weakness in recent months in the face of rising long-term bond rates and a firming dollar.
Gold found a floor at around $1,680 in March and has refused to fall below this level ever since, testing it again in August on an intraday basis before jumping back above $1,720 (where gold is trying to establish a higher supporting floor).
The December gold futures chart also shows last week’s attempted breakout above the widely-watched, and psychologically significant, 50-day moving average. In the last several reports I’ve emphasized that a decisive close above the 50-day line is needed to technically confirm that buyers have made a meaningful return to the market. A close above the 50-day line would also likely encourage some short covering, as it did in April and—to a lesser extent—in August.
Holding bullion prices back in the last few months has been a lack of fear on the part of investors, as risk assets like stocks and cryptos have held far greater attraction than safety-oriented gold. Last Friday, however, gold rallied on comments from a widely read advisor who opined that a default on China Evergrande’s offshore bond obligations was “imminent.”
An additional rally catalyst behind gold’s latest breakout attempt was the September U.S. nonfarm payrolls report, which increased by just 194,000, which fell far short of consensus expectations of around 450,000 and shocked the market. (The Delta variant and a tight labor market were blamed for the shortfall.) Average hourly earnings, meanwhile, rose 0.6% and faster than expected in reflection of “supply-driven inflation pressures.”
December gold initially rallied on the news, but completely surrendered its gain by the end of the October 8 trading session (after briefly touching the 50-day moving average). As discouraging as this may have been, however, a potentially significant development took place in the white metals market last week that normally carries a bullish implication for gold.
Specifically, platinum and palladium rallied 7% and 13%, respectively, for the week in what was the best showing for both metals since June. What makes this significant is the tendency for major rallies in both metals (especially platinum) to precede gold market rallies. Even more significant was the decisive close above the 50-day moving average in the December platinum futures contract (below).
The outperformance of the white metals mentioned above is definitely encouraging, but I hasten to add that the lag between rising platinum prices and a gold price rally can sometimes be several weeks. Moreover, gold continues to underperform stocks, commodities and the 10-year Treasury yield index (TNX). These are three key relative strength factors that need to improve before gold is on a strong enough footing for an extended intermediate-term (3-6 month) rising trend.
In other words, patience is still paramount for gold investors right now.
What to Do Now
Sector Xpress Gold & Metals Advisor readers recently purchased a half position in the GraniteShares Gold Trust (BAR). We were stopped out of speculative long position in the GraniteShares Gold Trust (BAR) on September 16 after its decisive intraday move under the 17.70 level. For now we’ll wait for the gold price to confirm that an intermediate-term has been established before making any additional trades in BAR. WAIT
New Recommendations/ Updates
Silver Still Underperforming Gold
Silver has underperformed its more expensive “sister” metal, gold, for the last three months. This is not an ideal scenario for silver to be in if it is truly on the cusp of a major rally.
Since July, the front-month silver futures contract is down around 15% while gold has declined just 4% in that same period. What’s more, gold has established a series of rising lows in the last couple of months while silver has made lower lows.
Even more telling is the gold/silver ratio, which is currently registering a reading of 77. This is too high for comfort, as the ideal ratio should be under 70—a level from which some of silver’s most contractive rallies have started in recent years.
It should be pointed out that the gold/silver ratio can’t be used as a market timing indicator, but it does provide worthwhile clues as to silver’s attractiveness as an investment relative to gold. And right now, the ratio is telling us that the interim outlook for gold is more favorable than that of silver.
As Midas Touch Consulting Korbinian Koller recently observed, “One advantage the silver investor has is that silver typically follows gold with a slight delay from the larger long-term time frame perspective.”
More patience is likely needed before we get the next confirmed intermediate-term silver buy signal. But when gold finally exits is year-long malaise, silver should follow it higher in short order.
What to Do Now
We were stopped out of our speculative half position in the iShares Silver Trust (SLV) on September 17 when our stop-loss slightly under the 21 level (intraday basis) was violated. I noted previously that a decisive close above the 50-day moving average is needed to confirm a reversal of the intermediate-term downward trend in SLV, an observation that I reiterate here. WAIT
Copper is Bottoming
Although the front-month copper futures price is down 13% from its May intraday high of $4.90 a pound, the red metal was up 3% last week in response to supply-related concerns in Peru, the world’s second-largest copper producer.
Northern Miner reports that Shanghai Futures Exchange warehouse inventories are at their lowest levels in over 12 years, while Mining.com said LME on-warrant inventories have slid almost 91,000 tons (down 27%) in the past week.
Copper-related news out of China is a mixed bag, with traders still worried that fallout from China’s major property developer, Evergrande, will hurt building-related copper demand (copper’s single biggest use). However, falling inventories and rising premiums in China are providing a strong counterbalance to the Evergrande-related fears for copper’s near-term outlook.
All told, the copper futures price is still trying to establish an intermediate-term bottom and appears to be close to establishing one. Assuming this happens in the next few days, we’ll likely get a confirmed buy for one of the stocks I placed on our watch list earlier this week, namely Taseko Mines (TGB).
A decisive breakout above 2 level will confirm the buy for TGB, as previously discussed. In the meantime, I’m adding another copper-focused stock to our buy list.
One way of getting some investment exposure to both copper and the strong-performing molybdenum market (up 115% YTD) 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 second quarter of 2021 was 402 thousand pounds. Taseko reported that molybdenum prices strengthened in Q2 and averaged $14.32 per pound (27% higher sequentially). Copper production for Q2 was 20% higher from a year ago, while cash flow from operations was $72.5 million (nearly double from a year ago). Things are expected to strengthen for the firm moving forward. Management said the current copper price and expected production growth are both supportive of improved financial performance at the Gibraltar mine over the remainder of 2021.
What to Do Now
Investors can do some nibbling in TGB on a close above 2 (the level that has stopped all previous rally attempts since July). I’ll update this position assuming the 2 level is overcome in the coming week. BUY A HALF ABOVE 2
Teck Resources (TECK) is one of the world’s largest copper producers and is also the second-largest seaborne exporter of coking coal, with four operations in Western Canada and significant high-quality steelmaking coal reserves. Going forward, Teck plans to double its copper production in the next two years, seeing demand for the metal dramatically increasing from the white-hot electric vehicle industry. A major Wall Street institution agrees, estimating Teck’s copper production will more than double from its “transformational” QB2 project (one of the world’s largest underdeveloped copper resources) in top producer Chile. Providing additional support for Teck’s copper strength is news that copper stocks in top consumer China hit their lowest levels since 2009, with London Metal Exchange inventories falling 27% last week. Analysts see the firm’s revenue jumping 68% in both Q3 and Q4, with earnings growth accelerating.
What to Do Now
Investors can do some nibbling in TECK here or on pullbacks, using a suggested initial stop-loss slightly under 24. BUY A HALF
Steel Bounces Back, Led by Coal
It was a bumpy ride for steel this summer, but the industrial metal is finally looking good again.
Steel rebar prices peaked at just under CNY 6,000 a ton in May and fell into a slump for the next three months before turning up again in August. The graph below shows the volatile path rebar prices have traced out since last May, including the recent comeback.
As of October 9, Shanghai steel futures were at CNY 5,900 a ton and within reach of record levels hit earlier this year. A tight supply situation and rising input costs (namely metallurgical coal) are reasons for steel’s latest strength.
Speaking of coal, prices for the key feedstock have soared nearly 200% since the beginning of the year, as China and Europe have suffered energy crises in recent weeks.
Additionally, production curbs in China have undercut steel mills, with output declining in the last two months as China aggressively pursues stricter environmental regulations aimed at reducing carbon emissions.
Higher demand for manufactured goods, from cars to appliances and cans, is another tailwind for steel.
With steel prices as shown above back near prior highs, this begs the question: Shouldn’t the prices of the leading publicly traded steel producing stocks follow the metal’s path higher? In most cases, a divergence between the physical metal and steel equities is resolved with the latter catching up with the higher commodity price. The lag between higher steel and higher steel stock prices can sometimes be pronounced, but only rarely do steel stocks fail to favorably respond to a steel price rally.
With this in mind, I’m keeping a close eye on several major steel stocks for a confirmed bottom and reversal signal, including Steel Dynamics (STLD), Cleveland-Cliffs (CLF) and Nucor (NUE). In light of the abnormal strength in steelmaking coal prices, however, I’ve decided to add a new recommendation to our stock portfolio in this closely related industry (below).
Alliance Resource Partners (ARLP) is a metallurgical coal mining complex operator with approximately 1.7 billion tons of coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia, making it the second-largest coal producer in the eastern U.S. Alliance produces a diverse range of metallurgical coal with varying sulfur and heat contents, enabling the company to satisfy the broad range of specifications required by steelmaking and thermal customers. The company also generates royalty income from mineral interests in premier oil and gas producing regions in the U.S., primarily the Anadarko, Permian, Williston and Appalachian basins. Analysts project revenue growth in the high teens for the next two quarters. A 3.4% dividend yield is an added bonus.
What to Do Now
Participants can purchase a conservative position in ARLP down to around 10 (stop) where the 25-day line can be seen in the daily chart. BUY A HALF
Aluminum Outperforming Industrial Metals
Aluminum prices remain elevated and are not far from the 13-year high of around $3,000 per ton last seen in September.
Aluminum futures were around $2,900 last week as persistently high demand and tight supplies continue to buoy the market. Production in top producer/consumer China has been dwindling as the nation continues to restrict aluminum smelting in an effort to meet carbon emission standards.
Further weighing on global aluminum supplies were environmental-related output restrictions in the EU, plus the recent military coup in Guinea, the world’s second-largest bauxite producer. Consequently, aluminum continues to outperform other key industrial metals, as demonstrated in the following graph.
Arguably the single biggest contributor to aluminum’s strength (as with steel) is surging coal prices. China consumes nearly two-thirds of the world’s aluminum, with 90% of its smelters utilizing coal as the primary feedstock for aluminum production.
And as David Fickling recently noted in a Bloomberg editorial, “Energy typically accounts for a third or more of the cost of aluminum—so when the price of energy rises, you can expect metal prices to do the same. In that sense, the aluminum [price] spike is another minor energy crisis analogous to the surging value of European gas and Australian coal.”
As noted in the above steel section, then, aluminum’s near-term outlook will likely continue to be driven by metallurgical coal market strength.
What to Do Now
Alcoa (AA) is one of the world’s largest aluminum producers, and as such stands to benefit from the persistent strength in the global aluminum market. Its operations include bauxite mining (aluminum ore), alumina refining (for smelting) and the primary aluminum manufacturing. With aluminum prices at 10-year highs, Alcoa is expected to see significantly higher free cash flows going forward. This is a big reason for the recent strength, especially after a string of high-profile institutions upgraded the company. Another reason for the optimism is the anticipated increase in automotive demand for the metal going forward. On the financial front, revenue was up $685 million, or 32%, from the year-ago period in Q2 on higher aluminum prices. Second-quarter earnings per share was $1.63 per share, $0.70 per share higher than the prior quarter, and $2.69 per share higher than the year-ago quarter. For Q3, the top line is expected to increase 19% from a year ago and 18% the following quarter. Add to that a possible dividend reinstatement within a year and we like what we see here. On September 7, I recommended using pullbacks to buy a half position in AA, using an initial stop-loss placed slightly under the 40 level. HOLD
Tin Rebounds
As discussed last week, we have a new buy signal for a mining company that will provide us with some exposure to tin after our stop-loss in the tin ETN was recently triggered. While the tin price itself has been subject to broad market volatility of late, demand for the metal remains strong
The London Metal Exchange tin price is up about 70% since January, mainly because of stable demand coupled with supply still not being able to catch up to it. This is in part due to a shortage from a major smelter in Malaysia, which was unable to fulfil contracts due to Covid-related lockdowns.
With tin remaining in a position of strength, I just 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 total global tin production.)
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. Total revenues for 2021 are projected to be around $310 million, up 66% from a year ago.
What to Do Now
Participants purchased conservative position in AFMJF last week using a level slightly under 58 as the initial stop-loss. BUY A HALF
I also placed the ADR for Glencore PLC (GLNCY) on a buy after its recent show of strength. Glencore is the well-known multinational commodity trading and producing firm, with exposure to oil and gas, minerals like coal, ag commodities and metals like copper, zinc and nickel. In other words, it’s an across-the-board natural resource play and, as such, allows investors to capitalize on broad commodity market strength.
Recent strength in the energy sector is responsible for much of Glencore’s outperformance vis-à-vis more metal-focused stocks, but its industrial metals business is also doing well. (Glencore’s CEO recently told the Qatar Economic Forum that world copper supplies need to double by 2050 in order to meet the growing demand for renewable energy, and the firm is well positioned to benefit from this demand explosion.)
Analysts anticipate 47% revenue growth for the full year.
What to Do Now
Participants bought a conservative position in GLNCY last week using a level slightly under 8.75 as the initial stop-loss. BUY A HALF
What to Do Now
Last week we were stopped out of the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) when our initial stop-loss slightly under 100 was triggered. SOLD
Current Portfolio
| Stock | Price Bought | Date Bought | Price 10/12/21 | Profit | Rating |
| Alcoa (AA) | 45 | 9/7/21 | 49 | 9% | Hold |
| Alliance Resource Partners (ARLP) | New | - | - | Buy a Half | |
| Alphamin Resources (AFMJF) | 0.73 | 10/8/21 | 0.73 | 0% | Buy a Half |
| Glencore PLC ADR (GLNCY) | 9.64 | 10/8/21 | 9.94 | 3% | Buy a Half |
| iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) | - | - | - | - | Sold |
| Teck Resources (TECK) | New | - | - | 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%.
The next Sector Xpress Gold & Metals Advisor issue will be published on October 26, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com
Copyright © 2021. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Performance: Subscribers should apply loss limits based on their own personal purchase prices.
Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.