May 3, 2022

It’s Still a Bull Market in Gold
Gold prices took a dive in late April, falling 6% after briefly reclaiming the $2,000 an ounce level earlier in the month. While disappointing, the yellow metal still finished the first four months of this year with a net gain of 6%.

Of technical significance, gold remains above its widely-watched 200-day moving average, which tells us that despite the recent weakness, the bulls still have control over the intermediate-term trend.

Providing some additional context for gold’s bull market from a fundamental perspective was last week’s long-awaited Gold Demand Trends 2022 report from the World Gold Council (WGC). ETF inflows came roaring back on safe-haven demand and inflation worries, attracting 269 tons of inflows in the first quarter—the highest level since Q3 2020, and more than reversing the annual net outflow of 174 tons from last year, according to WGC.

Taking advantage of domestic currency strength, most of those inflows were devoted to North American-listed gold funds, which grew by 171 tons. The report further observed “chunky inflows” into U.S.-listed funds that “dwarfed” outflows from Canadian-listed funds. Chinese- and Indian-listed ETFs also witnessed outflows in Q1, due to a combination of higher sovereign bond yields and profit-taking.

Worldwide retail bar and coin investment demand totaled 282 tons in Q1 which, while 20% weaker than a year ago, was still 11% higher than the five-year quarterly average.

In the U.S, however, inflation and geopolitical tensions fueled safety-driven demand for physical bullion. In fact, combined first-quarter sales of the U.S. Mint’s American Eagle and Buffalo coins saw the second-highest Q1 sales volume ever (1999 saw the highest). Gold interest among American investors is clearly on the upswing, which bodes well for our bullish thesis.

Meanwhile in Europe, bar and coin demand rose to its highest quarterly total since the second quarter of 2013. First-quarter sales demand was up 6% from a year ago and up an eye-popping 23% from the prior quarter. Russia’s invasion of Ukraine was named as one of the catalysts behind the increased European gold coin and bar demand.

The insights from WGC tell us that while Asian demand was soft in Q1 (which partly accounts for the recent gold price weakness), Western nation demand more than made up for it. And I believe the strong interest for gold among U.S. and European investors should keep the metal’s intermediate-term bullish trend intact going forward.

All told, there were more positives than negatives in the latest demand trends report.

Updates
Note: In the portfolio, I recommend that we hold off on initiating any new positions until the recent commodity market volatility calms down a bit more. Most of our current holdings, however, have held up well during the recent correction.

With inflation likely to persist, not only industrial metals but commodities in general should generally 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 outperform. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. After the 21% rally since our initial entry, I previously suggested taking 50% profit in this position. I also suggest raising the stop at slightly under 26 (closing basis) on the remaining position. HOLD 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 Q4, the company reported net income that was 220% higher from a year ago (28 cents per share) on revenue of $496 million that was up 20%, driven by higher titanium dioxide prices. Titanium dioxide segment profit was 55% higher for full-year 2021 and a whopping 143% higher for Q4. Going forward, analysts see sales rising 9% and earnings soaring 31% for 2022, which will likely prove conservative. A 5% dividend yield ties a bow on this package. Participants recently purchased a conservative position in KRO using a stop-loss slightly under 14.75 on a closing basis. I now recommend raising the stop to slightly under 15.10 where the 50-day line comes into play. BUY A HALF

Natural Resource Partners (NRP) 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. 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. The company also recently declared a 45-cent per share quarterly dividend (4% yield). 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 41.75 (closing basis) where the 50-day line comes into play. HOLD A HALF

Nucor (NUE) is a leading steel company with a massive market share in North American structural, cold finish and bar steels. Participants recently purchased a conservative position in NUE using a level slightly under 134 as the initial stop-loss. After the subsequent 11% rally, I suggested taking 50% profit and raising the stop on the remaining position to slightly under 154.50 (closing basis). This stop was violated on Monday, May 2, which kicked us out of our remaining position in this stock. SELL

Sigma Lithium (SGML) is a Canadian company that develops, through its subsidiary Sigma Mineraao S.A., hard rock lithium deposits in the Americas. Sigma’s properties are located in Brazil’s Minas Gerais State in the municipalities of Aracuai and Itinga, and the company holds nearly 30 mineral rights in four properties spread over 120 miles, including nine past-producing lithium mines. The firm is focused on producing battery-grade lithium concentrate from its Grota do Cirilo property—the largest lithium hard rock deposit in the Americas—to support the booming electric vehicle (EV) industry. Analysts expect Sigma will begin generating revenue by the end of 2022 as its lithium production commences at half scale, bringing the company one step closer to its goal of being the world’s largest low-cost lithium producer. Additionally, Bank of America recently picked Sigma as one of its top “scarcity plays” in the face of a tight supply backdrop in the global lithium battery space. Participants on March 22 bought a conservative position in SGML using an initial stop-loss slightly under 10.50 (closing basis). Last month, I suggested taking 50% profit in this stock after it rallied 14% from our initial entry point. I also recommend raising the stop-loss in the remaining position to slightly under 15 (closing basis). HOLD A HALF

SSR Mining (SSRM), formerly Silver Standard Resources, operates Argentina’s largest commercial silver project (Puna) and also produces gold, zinc, lead and tin. Participants purchased a conservative position in SSRM on April 12 using a level slightly under 21 as the initial stop-loss on a closing basis. We were stopped out of this position on Monday, May 2, when this level was violated. SELL

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%.