March 1, 2022

Historic Bullish Signal for the Gold Miners
After being stuck in a lateral range for the past year, gold was finally able to overcome the psychological $1,900 an ounce barrier that has held back all previous rallies since early 2021. Last week’s breakout to a new one-year high has injected gold bulls with some much-needed optimism that perhaps the metal is finally on its way to the all-time peak at $2,100.

It doesn’t hurt that all of gold’s key factors are in its favor right now, including widespread fear (Russia/Ukraine), rising inflation (up almost 8% on an annual basis in the U.S.) and, more recently, central bank demand. On the latter score, Russia’s central bank is set to resume gold purchases this week, according to news reports, as it seeks to stabilize its finances in the face of Western sanctions.

India’s central bank, meanwhile, is said to have embarked on a “buying spree” (in the words of Kitco News), gobbling up 78 metric tons of gold in 2021—its second-highest ever after 2009, when it bought 200 metric tons from the International Monetary Fund.

What’s more, for the first time since 2020, three of gold’s most important “Five Factors” are now in support of the bullion’s intermediate-term (3-9 month) outlook. As we’ve talked about in previous reports, the five factors include gold’s relative performance versus 1) the S&P 500, 2) silver, 3) the broad commodity market, 4) platinum/palladium and 5) 10-year Treasury yields. When at least three of the five factors are supportive, it usually pays to be long gold.

As of the start of March, gold is outperforming the S&P 500 and its rally is being confirmed by strength in the white metals silver, platinum and palladium. Historically, these are indications that gold’s uptrend has legs and could continue for several more months. (More importantly, the supporting factors suggest that gold’s latest rally is likely more than just short covering.)

Turning our attention to the gold mining stocks, Jason Goepfert of SentimenTrader has pointed out that for the first time in over a year, less than half of all mining stocks are in bear markets. As Goepfert observed, “That’s a pretty good dividing line between secular bull and bear markets in gold mining indexes...Bull markets tend to see this figure stay below 50%, which should be a good sign for the current move.”

After more than a year of more than half the mining stocks being in a bear market, this ends one of the longest streaks in more than 40 years, according to Goepfert!

It should be noted that the last time this indicator (see chart above) fell to a comparable level, the PHLX Gold/Silver Mining Index (XAU)—the benchmark for the major North American gold miners—rose mor than 25% over a three-month period. If this is any guide, the XAU should be able to recover its prior peak at the 165 level in the coming months (the index is currently 15% below that level).

Another of Goepfert’s observations regarding gold mining stocks merits repeating. He notes that total fund assets in the seven largest gold mining ETFs are “barely 2% of total sector ETF assets.” This represents the lowest allocation level in seven years and is well under prior peaks in 2016 and 2020 when gold mining stocks represented more than 5% of sector assets. From a contrarian’s perspective, this could also be good news for the gold stocks going forward.

Note: In the portfolio, we have one new addition this week.

Updates
On February 8, we bought a new trading position in Alcoa (AA) based on its technical and fundamental strength. Alcoa easily beat expectations in Q4 in reporting a 40% increase in sales and earnings per share of $2.50 (a 59-cent beat). The company generated revenue of $12.2 billion for the full year, up 31% from a year ago and the highest since 2018, while recording its highest ever annual net income and per-share earnings of $2.26. Going forward, the company sees higher aluminum prices as a major tailwind and plans to continue its strategy of reducing debt and pension obligations while increasing shareholder returns, recently initiating a new $500 million share repurchase program. Wall Street, meanwhile, sees revenue growth of 14% in Q1 and per-share earnings growth of around 200%. Last month, I recommended that we book a quarter profit in Alcoa after the stock’s 10% rally. I also suggest raising stop-loss on the remaining position to slightly under 70 on a closing basis. HOLD

South Africa-based Gold Fields Ltd. (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of over 2 million ounces, attributable gold-equivalent mineral reserves of 52 million ounces and mineral resources of 116 million ounces. The stock typically outperforms the physical metal when gold is in an established intermediate-term rising trend. Gold Fields just reported that its earnings increased an eye-popping 22% earnings to $890 million, or $1 a share, for 2021 compared to a year ago. Revenue of $1.8 billion, meanwhile, rose 8% in spite of higher production costs. Attributable gold equivalent production for 2021 was 5% higher from a year ago and above guidance, while all-in sustaining costs were $1,063 an ounce—well below gold’s current price of around $1,900 an ounce. The company said South Deep was the “stand-out performer” of 2021, with production increasing 29% on lower all-in costs. South Deep also generated cash levels that were 157% from 2020, and there are plans to ramp up production at this mine to around 370,000 ounces by 2025 based on its consistent improvement. Looking ahead, management said it expects production to grow by an additional 20 to 30% over the next three to four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Additionally, Gold Fields said it will pay a final dividend of 2.60 rand per share, taking the total payout for the year to 4.70 rand per share. As mentioned previously, aggressive traders can nibble here or wait for a pullback. I suggest raising the stop-loss from 10.90 to slightly under 11.50 (closing basis). BUY A HALF

With inflation likely to persist at least through the first half of 2022, not only industrial metals but commodities in general should outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e. fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason, I expect DBC—which is heavily skewed toward the energy sector—to continue to show relative strength. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. I suggest raising the stop to slightly under 22 (closing basis) near the 50-day line. HOLD

I placed the iPath Series B Bloomberg Tin Subindex Total Return ETN (JJT) on a buy on January 10 after the improvement in the tin price following a brief stumble in December. Keep in mind this is an exchange-traded note (ETN), not a traditional ETF, which is an unsecured debt note that trades more like a bond than a stock. Earlier last month, I recommended buying conservative position in this tin-tracking vehicle. I also recently recommended taking a 50% profit in this position after January’s big rally. I now suggest raising the stop-loss on the remaining position to slightly under 130 on a closing basis. HOLD A HALF

As previously discussed, prices for steelmaking coal are on the rise, which is partly attributable to the improved outlook for steel production and consumption globally. A beneficiary of higher coal prices is Natural Resource Partners (NRP), which is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including 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. In the third quarter, the company reported revenues of $57 million that were 90% higher from a year ago. Per-share earnings of $1.10, meanwhile, beat consensus expectations by 28 cents. Management said it sees steel demand “remaining strong” going forward, as global economic recovery is “more than offsetting” Covid-related challenges. The company also just declared a 45-cent per share quarterly dividend last week (4.8% yield). Q4 earnings are expected on May 11. Participants recently purchased a conservative position in NRP using a level slightly under 31 as the initial stop-loss on a closing basis. After the recent 10% rally, I recommended selling a half and raising the stop on the remaining position to slightly under 34.50 (closing basis). Maintain that stop for now. HOLD A HALF

Traders who want some exposure to the platinum group metals purchased a conservative position in the Sprott Physical Platinum & Palladium Trust (SPPP) on February 8. This closed-end trust invests in unencumbered and fully-allocated good delivery (redeemable for metals) physical platinum and palladium bullion and should benefit from the bullish fundamental backdrop for both metals (especially in the wake of the Russia/Ukraine conflict, given Russia’s dominance producing both metals). I suggest using a level slightly under the recent low of 15.40 as the initial stop-loss for this trading position. BUY A HALF

In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), participants who wish to have some exposure to the metal purchased a conservative position in Teck Resources (TECK) on February 8. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. In the fourth quarter, Teck reported revenue of $4.4 billion that was 78% higher from a year ago, while per-share earnings of $1.98 beat estimates by 6%, driven by higher prices for copper and steelmaking coal (a business Teck plans to transition away from). Teck also raised its annual base dividend to 50 cents per share (from 20 cents), and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit top-line and triple-digit bottom-line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons, (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I suggest booking 50% profit and raising the stop-loss on the remainder of this trading position to slightly under 33.25 on a closing basis. SELL A HALF

Vale S.A. (VALE) is one of the world’s largest iron ore and nickel miners, as well as a diversified producer of other industrial and precious metals. Earlier this year, the company garnered attention when management announced an ambitious plan to reach 400 million tons of iron ore production by 2022, which, if realized, would be a 33% increase from 2020’s total production. More recently, though, Vale has shifted its focus on so-called “green” metals in an effort to diversify and generate higher shareholder returns. In the fourth quarter, Vale’s revenue of $13.1 billion was dropped 11% from a year ago but beat the consensus forecast by 2%, while per-share earnings of $1.07 beat estimates by 20 cents. The company’s iron ore production fell 2.4% in Q4, while iron ore sales increased 0.4%. Vale also announced the distribution of dividends to shareholders of 3.7 reais per share (equal to around $3.5 billion). A major financial institution subsequently upgraded Vale shares based on rising iron ore prices. I previously recommended raising the stop-loss to slightly under 16 on a closing basis (maintain this stop for now). Vale has given us 30% profit since December, but the stock is now starting to run up into what could prove to be strong overhead supply/resistance beginning at 18 and extending to 22. Moreover, the nickel market (which Vale partly represents) is admittedly becoming a bit overheated and could therefore exert a negative spillover impact on Vale and other nickel-related stocks. HOLD A HALF

New Positions
Uranium and uranium miners have been in the doldrums since prices peaked last November, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is starting to attract new interest among investors while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—looks attractive after correcting almost 40% between November and January. Participants can buy a conservative position, using an initial stop-loss slightly under the 20 level (closing basis). I’ll have more to say about uranium in general and URA in particular in next week’s regular issue of the newsletter.

Portfolio

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%.