It is often said the oil is the lifeblood of the global economy, but when prices fall too much too rapidly, as they have in recent days, market participants often speculate that those low prices don’t augur well for the broader economy.
Still, at the industry level, there are beneficiaries of lower oil prices and those include precious metals miners. Lower crude prices could provide a lift for the VanEck Vectors Gold Miners (NYSEArca: GDX), which has recently been under pressure.
GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Stock fundamentals like cost deflation across the mining industry, share valuations below the long-term average and rising M&A are all supportive of the miner’s space as well, but those fundamentals could be glossed over if the dollar strengthens.
Mining companies are big energy consumers and lower energy costs could provide a lift to margins.
“How positive the effects will be varied by company depending on the type of metal they produce and how they mine it,” according to Bloomberg.
Margins Matter
Often integral to the investment thesis for gold miners, including the names featured in GDX, is how well these companies can manage costs, an important consideration even when bullion prices are rallying.
“For gold companies, already benefiting from prices trading near a seven-year high, the likelihood of a positive impact is higher. For a company with cash costs of, say, $800 an ounce, roughly $200 would typically be energy cost,” reports Bloomberg.
David Harquail, chief executive officer of streaming and royalties company Franco-Nevada Corp., said in an interview with Bloomberg that that $200 per ounce could be closer to $100 today following oil’s recent slide.
As the coronavirus outbreak continues to be the wild card in the markets, the safe haven of precious metals is in high demand, especially for exchange-traded funds (ETFs) that are backed by gold. ETFs have been stockpiling gold as more coronavirus news continues to invade the financial markets.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
