|
Okay, we get
it: gold miners are not the same thing as gold. Mining is a business with all
kinds of issues that have nothing to do with the metal's price. Shafts can
cave in, governments can demand contract revisions or nationalize
foreign-owned properties, and energy and labor costs can go up faster than
revenues.
Oil, in fact,
was probably the main reason that mining shares have tanked recently. Before
it can be sold, gold in the ground and has to be dug up and processed, and
this takes a lot of energy. So when oil goes up faster than gold, the miners'
margins get squeezed, they miss their earnings targets and their stocks sell
off.
But the
reverse is true as well -- when oil goes down, miners get more profitable.
And lately oil has been plunging:
Oil
price at year low
The price of
oil is falling again as inventories grow more than expected and signs that
global consumption will slow. Benchmark light sweet crude for July delivery
lost $1.27 to $86.55 US per barrel in midday trading in New York. Brent crude
fell $1.68 to $101.90 per barrel in London.
The U.S.
Energy Information Administration said Thursday crude supplies rose by 2.20
million barrels to 384.70 million barrels last week. Analysts had expected a
gain of 100,000 barrels.
Because oil
is priced in U.S. dollars, a rising greenback -- the result of a flight to
safety by investors worried about where the global economy is headed -- added
to the downward momentum of oil prices.
And with the
price of Canada's biggest commodity export slipping, that also weighed on the
Canadian dollar, which reached a low for the year, at under
97 cents US.
Oil is also
at a 2012 low, and is headed for its biggest monthly decline since December
2008. Oil has dropped more than 18 per cent so far in May.
Prices are
falling on expectations that the world won't use as much oil this year as
previously thought. Europe's financial crisis is the most immediate concern,
but there have been plenty of signs of weaker demand.
Oil rose near
$110 per barrel in February because of the potential for conflict between
Iran and the West. Those tensions have eased somewhat, and the market's focus
has turned to weak spots in the global economy.
Prices have
been falling due to a variety of factors. On Thursday, the U.S. reported that
the economy grew by 1.9 per cent in the first quarter, slower than first
estimated.
The number of
Americans seeking unemployment benefits also rose last week to a five-week
high.
Tensions also
are easing over Iran's nuclear program, reducing chances for a conflict in
the Persian Gulf. And China's manufacturing sector is slowing down while
Europe's banking crisis threatens to plunge the region into recession.
Note also
that falling oil puts pressure on the currencies of resource economies like
Canada. Since miners pay their workers in local currency, a falling C$ makes
mining in Canada even less expensive. The result, this past week, was a nice
pop in gold mining shares relative to the underlying metal:
No guarantee
that this continues of course, but the odds are that it will, if for no other
reason than mean reversion. The miners have underperformed gold for so long that
a snap-back is overdue, and could be massive once it gains some traction.
|
