Month: May 2021

Strong demand for bullion products amid tight market conditions and unprecedented “stimulus” measures from Washington have lots of people asking lots of questions.

Here we will answer a few of the most pressing questions currently on the minds of precious metals investors.

Is the attempt to force a “silver squeeze” on the futures market viable?

We think so. Silver is one of the most heavily shorted assets on the planet, and the amount of paper contracts far exceeds available physical inventories.

But the “silver squeeze” movement should be aware that mechanisms are in place on the exchanges for cash settlement.

The pros who trade in these paper contracts have sophisticated hedging and exit strategies.

That said, sustained bullion buying at elevated levels could very well be the wild card that causes a run on physical silver and a spike in prices.

Investment demand has been a big driver of physical off-take, and so has silver’s increasing industrial and green energy applications.

To be sure, shortages currently exist in some retail bullion products, largely a result of production bottlenecks and high retail investor demand for the white metal.

But there are no discernable shortages in COMEX or LBMA “good delivery bars” – at least not yet.

I’m worried about all the inflation the Biden administration and the Federal Reserve are pumping into the economy, but how can I be sure precious metals will provide protection?

History proves that gold and silver perform well overall in inflationary times.

But they aren’t guaranteed to rise on day-to-day basis. Precious metals shine when measured over an entire inflation cycle, which can last years or even decades.

During the decade of the 1970s, as paper assets got clobbered by inflation, gold delivered average annual returns of 30.7%. The S&P 500 barely eked out nominal gains of 1.6% per year – which were far too puny to keep pace with an inflation rate that surged into the double digits by the end of the decade.

Looking longer term, gold has risen almost 10,000% – from $20 to nearly $2,000 per ounce – since 1930, priced in America’s depreciating fiat money.

Are gold mining stocks a good substitute for physical gold?

No. It’s important to keep in mind that physical precious metals and mining stocks are entirely separate asset classes.

Gold is a tangible form of money; mining stocks are financial assets that are subject to a host of additional risks besides the market price of gold.

During the turbulent market conditions of 2008, when gold prices gained overall, the leading gold miners index (the HUI) lost nearly 30% of its value.

Incidentally, since its inception, the HUI gold stocks index has underperformed the gold price.

How can I tell when a coin dealer might be trying to rip me off?

We often warn against the nefarious tactics of high pressure “rare” coin salespeople, particularly those working for prominent dealers who advertise heavily on TV. We get plenty of horror stories from clients who have run afoul of these operators.

We’ve heard all about the never-ending follow-up phone calls from slick talking hucksters eager for another huge commission.

Among the lies they tell include whoppers like collectible coins aren’t ever taxable.

Or that super expensive numismatic coins in those spiffy plastic slabs are somehow less prone to government confiscation.

The most common bit of blarney is that you should move fast to buy some coin, which is in fact not particularly rare or desirable, at a huge premium to its melt value because swarms of future collectors will pay even more to get their hands on it. Don’t bet on it!

Check on a dealer’s reputation online and with the Better Business Bureau before giving them your business. And don’t be afraid to call and gauge the quality of their customer service for yourself.

Don’t make the mistake of automatically going with a dealer who appears to be quoting the lowest price for a product. That price may not include hidden charges or upsells that are tacked on later.

The firm may not even have the promised product available. Certain “low cost” dealers have been known to impose delivery delays of several weeks or even months – and in the recent past some of them gone out of business while leaving anxious customers with open orders in limbo.

      

(May 3, 2021) Little Rock, Arkansas –  By signing sound money legislation today, Arkansas Gov. Asa Hutchinson has officially ended sales taxation on gold, silver, platinum, and palladium bullion and coins– thereby setting an example for legislators in New Jersey, Maine, Ohio, and Tennessee, who are still considering similar measures in their own states this year.

Arkansas’s Senate Bill 336, originally introduced by Sen. Mark Johnson and Rep. Delia Haak, enjoyed tremendous popularity, passing through the state Senate 30-1 before passing out of the state House unanimously by a vote of 93-0.

Backed by the Sound Money Defense League, Money Metals Exchange, and grassroots activists and coin dealers in Arkansas, Senate Bill 336 will allow Arkansas investors, savers, and small businesses to acquire precious metals without being slapped with sales and use taxes.

The Arkansas sales tax exemption takes effect on July 1, 2021.

Meanwhile, similar bills are still pending in Ohio, Maine, Tennessee, and New Jersey as the national backlash against taxing constitutional money continues.

Governor Hutchinson signs Senate Bill 336 alongside

sponsors and supporters of the measure

Including Arkansas, 40 U.S. states now fully or partially exempt gold and silver from sales taxes. That leaves 10 states and the District of Columbia as the primary jurisdictions that still harshly penalize citizens seeking to protect their savings against the serial devaluation of the Federal Reserve Note.

States have been removing sales taxes from monetary metals for the following reasons:

• Taxing precious metals is unfair to certain savers and investors. Gold and silver are held as forms of savings and investment. States do not tax the purchase of stocks, bonds, ETFs, currencies, and other financial instruments, so it makes no sense to tax monetary metals.

• Levying sales taxes on precious metals is illogical because gold and silver are inherently held for resale. Sales taxes are typically levied on final consumer goods. Precious metals are inherently held for resale, not “consumption,” making the application of sales taxes on precious metals illogical and especially inappropriate.

• Taxing gold and silver harms in-state businesses. It’s a competitive marketplace, so buyers in states with precious-metals sales taxes often take their business to neighboring states that have eliminated or reduced sales tax on precious metals. Investors can easily avoid paying $136.50 in sales taxes, for example, on a $1,950 purchase of a one-ounce gold bar. Therefore, levying sales tax on precious metals harms in-state businesses, who will lose business to out-of-state precious metals dealers.  Coin conventions also tend to avoid the sales tax states.

• Taxing precious metals is harmful to citizens attempting to protect their assets. Purchasers of precious metals aren’t fat-cat investors. Most who buy precious metals do so in small increments as a way of saving money. Precious metals investors are purchasing precious metals as a way to preserve their wealth against the damages of inflation. Inflation harms the poorest among us—including pensioners, Arkansans on fixed incomes, wage-earners, savers, and more.

Jp Cortez, policy director for the Sound Money Defense League, explained that “the vast majority of states realize that taxing sound money harms in-state investors, in-state businesses, and even state revenues.”

Cortez continued: “by eliminating taxes on the purchase of gold and silver, Arkansas citizens can protect themselves against inflation, while citizens in the few states that still tax sound money are punished for trying to preserve their wealth.”

Having eliminated sales taxes on the monetary metals, Arkansas will rise from dead last in the Sound Money Index to 30th place among the 50 states.

      

Source: McAlinden Research for Streetwise Reports   04/30/2021

Rising electrification in America’s auto industry is likely to boost the prices of key metals needed to make the electric and battery-powered transformation a reality. This McAlinden Research Partners article discusses the surging demand for copper and lithium, and the potential supply-side shortfalls.

Rising electrification in America’s auto industry is likely to boost the prices of key metals needed to make the electric and battery-powered transformation a reality. Copper and lithium are already some of the hottest commodities on the market these days, but several catalysts for surging demand are visible throughout the next decade.

When it comes to the supply side, though, each of those metals face potential shortfalls if they cannot adequately ramp up output. The supply of copper is already expected to fall into a global deficit this year, while producers in the lithium market look like they may be initiating a wave of consolidation to improve their scaling and profitability.

Related ETFs: Amplify Lithium & Battery Technology ETF (BATT), iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC), Global X Copper Miners ETF (COPX)

Strong U.S. EV Market Spurs Demand for Key Metals

The electric vehicle (EV) market in the U.S. may be set to spin into overdrive.

Last month, President Biden proposed spending $174 billion to promote EVs and install 500,000 charging stations across the U.S. as part of a sweeping infrastructure announcement, a plan MRP highlighted months prior to this official announcement. Bloomberg writes that the charging infrastructure would cover 57% of the charging that U.S. vehicles will need by 2030 and could spark the sale of some 25 million electric cars and trucks.

To receive all of MRP’s insights in your inbox Monday–Friday, follow this link for a free 30-day trial. This content was delivered to McAlinden Research Partners clients on April 13.

$100 billion of that spending will go toward consumer rebates. That program would replace the $7,500 rebates General Motors and Tesla Inc. no longer qualify for after they sold more than 200,000 zero-emission models. Per Reuters, the plan lays out $20 billion for electric school buses, $25 billion for zero emission transit vehicles and $14 billion in other tax incentives.

New data from Cox Automotive and Kelley Blue Book found sales of battery-powered EVs grew 44.8% YoY during the first quarter of 2021, with 98,832 units sold, as compared to 68,247 electric vehicles sold in the first quarter of the 2020 calendar year. Tesla was the dominant electric vehicle brand in Q1 2021, with 69,300 vehicles sold, or 71% of total EV sales in the U.S. during the time period.

These trends bode especially well for metals that are critical in the production of electrification and battery technologies. In particular, copper and lithium.

Copper—”The New Oil”?

Copper stockpiles in LME-approved warehouses recently hit their highest since November at 172,025 tonnes, but that hasn’t stopped the ongoing rally in copper futures from touching a 2-month high at $4.245/lb—up more than 80% from a year ago.

In a new Goldman Sachs report, published Tuesday, the investment bank referred to copper as “the new oil”, also noting that the market is facing a supply crunch that could boost the price by more than 65% in four years. By 2025, global demand for copper is expected to soar to nearly $15,000 per tonne, up from current prices of around $9,000 per tonne, per the bank’s estimates.

Due to mass adoption of green technologies like batteries and electrification, demand would significantly increase by up to 900% to 8.7 million tons by 2030, the bank estimates. Should this process be slower, demand will still surge to 5.4 million tons, or by almost 600%. By the start of the next decade, Goldman estimates “a long-term supply gap of 8.2 million tons by 2030, twice the size of the gap that triggered the bull market in copper in the early 2000s.”

Electric vehicles take around 83 kilograms of copper on average, while charging points need 10 kilograms of copper per unit. A team of Jeffries analysts, led by Christopher LaFemina, expects copper demand in EVs will rise to 1.7 megatons in 2030 from 170 kilotons in 2020. Additionally, a shift from coal and gas power to wind and solar works in copper’s favor because those systems require five times more copper than conventional ones.

Even in the here and now, the world is just about getting by with current copper supplies. Part of that can be chalked up to reduced output in 2020 from COVID-induced mine closures in South America, but a much larger component has been China’s rampant demand. In March, the country’s copper imports rose 25% from a year earlier, capping off a strong first quarter that saw overall imports of the orange metal at 1.44 million tonnes, up 11.9% YoY, and the highest first-quarter amount since at least 2008, according to Reuters data.

Citi expects global demand for the metal used widely in power and construction to grow 6.5% this year to 24.75 million tonnes, and sees a deficit of 521,000 tonnes.

Additionally, Citi analyst Max Layton notes that supplies of copper scrap will jump this year, but scrap is unlikely to come fast enough to meet robust demand, “given logistical constraints and an 8-month lag between price strength and copper scrap coming to market for processing.”

As MRP has highlighted previously, scrap is a diminished threat these days with fewer large stockpiles left to materially shift the market. Michael Lion, a trader at Hong Kong-based Everwell Resources, told Fastmarkets: “These days, there are no longer people holding big… inventories in the scrap industry—like [they would have done] 20 to 30 years ago when the industry was dominated by family businesses. So, the increase in prices does not do that much in [terms of] drawing out much more material.”

Lithium Powers up the Battery Boom

In a recent note, analysts at Macquarie Research predicted that demand for electric vehicles could trigger “material shortages” of the metal from 2025. Widely used lithium-ion batteries contain around 7% to 10% lithium regardless of the overall battery chemistry, Macquarie said.

Per the Financial Times, lithium carbonate prices have soared about 70% this year on strong demand for electric vehicles, and Macquarie forecasts further price increases of 30%–100% over the next four years.

Bloomberg New Energy Finance projects battery demand to surge tenfold by 2030.

General Motors (GM) shows automakers are finally taking the EV revolution seriously, going all-in on its own lithium ion (Li-ion) battery factories. TechCrunch reports that GM recently announced plans to build a second U.S. battery cell factory—a $2.3 billion facility in Spring Hill, Tennessee—with LG Chem as joint-venture partner. Once fully operational in 2023, the joint venture’s two battery factories will have production capacity of more than 70 gigawatt hours, double the capacity of Tesla’s Nevada Gigafactory.

The Wall Street Journal reports that the two companies’ first battery plant in northeast Ohio is already under construction and expected to open next year. As we highlighted last year, there were over 100 battery megafactories being planned around the world.

As the industry continues to mature, major players in the lithium business may be looking toward consolidation to improve their operations and economies of scale.

Just last week, Australian lithium miner Orocobre Ltd. bought smaller domestic peer Galaxy Resources for $1.4 billion to create the world’s fifth most valuable lithium producer. As Reuters reports, the all-stock deal for A$1.78 billion ($1.38 billion) will establish Australia’s most valuable lithium miner with a A$4 billion ($3.1 billion) market capitalization. After years of Australian mine closures and drawdowns in an effort to drain a supply glut that consistently dampened prices, both companies have unveiled significant expansion plans, putting the merged company on track to produce more than 130,000 tonnes of lithium carbonate equivalent (LCE), up from around 40,000 tonnes now, according to analyst Reg Spencer of broker Canaccord Genuity.

Theme Alert

MRP added LONG Copper and Copper Miners to our list of themes on July 17, 2020. We’ve been tracking the theme with the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) and the Global X Copper Miners ETF (COPX), which have returned +43% and +95%, respectively, over the life of the theme. Each of those have significantly outperformed the S&P 500’s return of just +28% over the same period.

We added LONG Battery Metals to our list of themes on August 14, 2020, tracking the theme with the Amplify Lithium & Battery Technology ETF (BATT). Since then, the BATT has returned +47%, more than doubling the S&P 500’s +22% return over the same period.

Originally published April 21, 2021.

McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm’s mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients’ attention. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.

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