How Will Gold Fare in an Economic Hurricane?
Hurricane season is upon us, a time of year that normally sees increased storm activity along America’s coasts. If a prediction by a major investment bank is correct, the U.S and other major countries will also experience an “economic hurricane” at some point in the coming months.
The “hurricane” prediction made headlines last week after JPMorgan Chase (JPM) CEO Jamie Dimon used the term to describe what he sees as a precarious balancing act the Federal Reserve must perform in trying to control inflation by raising interest rates without pushing the economy into recession.
Dimon further said the government’s spending spree during the Covid recession, along with the ongoing Ukraine war, are additional economic headwinds that could prove his storm forecast correct.
If that’s not enough to worry about, Tesla’s (TSLA) CEO Elon Musk gave investors another start last week when a leaked email revealed he would cut 10% of salaried workers based on his “super bad feeling” about the economic outlook. The story was widely reported and was greeted with a 9% drop in Tesla’s stock.
Both predictions weighed on equities late last week, but gold understandably fared better in the face of the recession worries. Bullion prices jumped $25 an ounce on Thursday while the market was digesting both headlines—a clear reminder that gold is still a preferred safe haven for investors during times of uncertainty.
But even if the grim “hurricane” forecast should fail to materialize, there are still plenty of reasons why gold should outperform in the second half of 2022. Let’s consider some of them.
One bullish catalyst for gold going forward is rising energy prices which, perhaps more than any single factor, underscore the extent to which inflation pressures are likely to persist. Fund managers and institutional investors normally look at crude oil as a primary indicator for whether the broad outlook for commodities is bullish. When oil prices are soaring, they typically allocate more money to gold under the assumption that the inflation-sensitive metal will eventually respond positively to inflation.
Another factor is the likelihood that major foreign currencies, like the British pound and the euro, have bottomed after extended weakness. The U.S. dollar, meanwhile, is starting to look “toppy” after a long upside run. Strengthening foreign currencies and a weaker dollar should give gold prices an added lift since it would improve gold’s currency component.
And while it’s not a major reason by itself, the recent improvement in the platinum price is also encouraging from a gold bull’s perspective. Historically, extended rallies in the yellow metal are frequently preceded by turnarounds in the platinum market (although the fundamental reasons for this correlation are admittedly nebulous).
That said, given the recent improvements to gold’s technical and psychological backdrop, I’m recommending a new position in our favorite gold-tracking fund (see below).
Updates
Fluor (FLR) is a leading engineering firm, providing construction, maintenance and project management services for the oil and gas, industrial and infrastructure and power generation (including nuclear) industries. The company also offers process expertise in metals and mineral mining, including for gold, copper, coal, nickel and uranium and provides support for fertilizer producers. Management has indicated that dividends and share repurchases are possible as the firm builds its backlog and improves the quality of earnings in cash generation. Analysts project double-digit earnings and revenue growth for this year and next. Participants bought a conservative position in FLR last week using a level slightly under the 24.70 level (closing basis) as the initial stop-loss. BUY A HALF
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. Kronos also declared a 16-cent dividend (4% yield), in line with the previous one. Meanwhile, Deutsche Bank just raised its price target on the stock from 18 to 20. On May 19, I advised traders to take 50% profit in KRO after its 18% rally from our initial entry point. I also recommend raising the stop-loss on the remaining position to slightly under 17 (closing basis). HOLD A HALF
Natural Resource Partners (NRP) is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including steelmaking 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. NRP posted Q1 revenue of $90 million (up 142% from a year ago) and per-share earnings of $3.11 that handily beat estimates, led by rising demand for steel, electricity and renewable energy. NRP also said it generated $52 million of free cash flow in the quarter and $152 million over the last year (up 120% and 85%, respectively). This allowed the company to return additional cash to shareholders through a dividend increase (to 75 cents per share from 45 cents). 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. 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 46.50 (closing basis) where the 50-day line comes into play. HOLD A HALF
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 cargoes 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 recently purchased a conservative position in SFL. I recommend raising the stop-loss to slightly under 10.50 (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. SQM posted a stellar 12-times increase in net income for Q1 on the back of strong revenue thanks to higher lithium prices. The results pushed SQM to a string of new highs in late May, prompting us to book some profit in our trading position in this stock. I now recommend that traders raise the stop-loss to slightly under 83.70 (closing basis.) HOLD A HALF
Steel prices are showing relative strength after the recent price correction. Record demand from the automobile, construction and appliance industries have prompted at least one major steelmaker to guide for its “best-ever” second quarter after recently delivering its best-ever first quarter. One of my favorite ways of leveraging steel strength is by owning an actively traded exchanged-traded fund that closely tracks the steel price, namely the VanEck Steel ETF (SLX), which tracks the overall performance of major companies involved in the steel sector. Participants last week purchased a conservative position in SLX using a level slightly under 57 as the initial stop-loss on a closing basis. BUY A HALF
New Positions
BHP Group (BHP) is a leading global producer of copper, iron ore, nickel, oil, gas, and metallurgical coal, as well as potash fertilizer. As such, the company is diversified across the broad metals and mining sector with lots of exposure to some potentially strong markets in the intermediate term. BHP made headlines most recently after completing an oil/gas merger with Australian petroleum producer Woodside Energy (WDS). BHP got a further boost when Goldman Sachs reiterated its bullish outlook on the company based on BHP’s “major opportunity” to develop its copper reserves and resources (the largest in the industry). Participants can purchase a conservative position in BHP around current levels using an initial stop-loss slightly under 63 (closing basis). BUY A HALF
After the recent technical improvement in gold, participants can buy a conservative position in the GraniteShares Gold Trust (BAR). BAR is my gold tracker of choice when gold prices are on the rise (due to its attractive per-share price), and I’m expecting increasing recession worries among investors to bolster gold’s demand profile. I suggest using a level slightly under 17.94 (the May 13 bottom) as the initial stop-loss on a closing basis. BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price on 6/6/22 | Profit | Rating |
| BHP Group (BHP) | -- | NEW | -- | -- | Buy a Half |
| Fluor Corp. (FLR) | 27.2 | 5/31/22 | 28.3 | 4% | Buy a Half |
| GraniteShares Gold Trust (BAR) | -- | NEW | -- | -- | Buy a Half |
| Kronos Worldwide (KRO) | 15.25 | 4/12/22 | 19 | 25% | Hold a Half |
| Natural Resource Partners (NRP) | 34.75 | 1/16/22 | 47.85 | 38% | Hold a Half |
| SFL Corporation (SFL) | 11.5 | 5/17/22 | 11.4 | -1% | Buy a Half |
| Sociedad Química y Minera (SQM) | 83.5 | 5/17/22 | 103 | 23% | Hold a Half |
| VanEck Steel ETF (SLX) | 62.9 | 5/31/22 | 63.5 | 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%.