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Mining companies post a strong finish. During the fourth quarter, mining companies (as measured by the XME) appreciated 7.3% compared to a gain of 10.6% for the S&P 500 index. The VanEck Vectors Gold Miners (GDX) and Junior Gold Miners (GDXJ) ETFs were up 8.7% and 9.4%, respectively. Gold, silver, copper, and zinc futures prices were up 4.0%, 6.1%, 9.1%, and 8.5%, respectively, while lead was down 2.4%. For the full year, gold and silver prices declined 4.5% and 12.1%, respectively, while copper, lead, and zinc prices were up 26.4%, 21.3%, and 33.6%. Performance in 2021 was driven by base metals equities as underscored by the 33.9% price return on the XME versus -11.1% and -22.7% for the GDX and GDXJ, respectively. The S&P 500 appreciated 26.9%. Outlook for precious metals. The U.S. Dollar Index rose 1.7% during the fourth quarter and 6.4% in 2021. The yield on the 10-year rose modestly during the fourth quarter to 1.51% and was up 59.5 basis points compared to year-end 2020. While a rise in the U.S. dollar and treasury yields are headwinds for gold, we believe investors may view precious metals more favorably in 2022 to protect portfolio values from potential volatility in equity markets, an uncertain path for inflation, and the risk of Federal Reserve monetary policy errors. While the Federal Reserve has signaled that it will end monthly bond purchases in March and could raise interest rates three times in 2022, we think market expectations are partially baked in and investors will likely focus on real interest rates which are expected to remain low. Can industrial metals continue their ascent? While U.S. and global economic growth is expected to moderate and we don't expect the same level of gains for industrial metals in 2022, cash flow generation should remain strong for industrial metals companies while supply and demand fundamentals remain favorable. Improving supply chains, inventory re-stocking, and greater capital spending could be supportive of pricing, and we believe the long-term investment case for owning industrial metals mining companies remains favorable. Weaker growth abroad, particularly in China, remains a near-term threat. Putting it all together. We remain constructive on the Metals and Mining sector. While precious metals underperformed industrial metals in 2021, we believe precious metals mining equities could outperform in 2022. Valuations, particularly among junior companies, remain attractive while current gold and silver prices are sufficient to be profitable. Additionally, we are beginning to observe an increase in M&A activity which highlight value in the sector based on acquisition premiums. Read More >>
