Email of the day (1)
Comment of the Day

August 08 2011

Commentary by Eoin Treacy

Email of the day (1)

On precious metals mining shares:
"In Monday's audio, mention was made of earnings downgrades. It occurs to me that for mining companies, especially precious metals, the case may be the opposite as they will benefit from both rising metals prices and falling expenses, i.e. fuel. Might this not become a tailwind for precious metals mining shares, which have been lagging their respective metals?

"P.S. As a relatively long-time subscriber, I must commend both of you on the consistency of excellence delivered through your service."

Eoin Treacy's view Thank you for the thoughtful comments on the service, plus a question likely to be of interest to many subscribers.

In a period of GDP growth slowdown and weaker stock markets, as we have experienced since April and more dramatically recently, industrial miners are likely to experience weaker metal prices before the corrective phase or bear market is completed. Also, fuel prices represented here by this weekly chart of Brent crude remained uncomfortably high although they have weakened in the last fortnight.

Additionally, miners face cost pressures from wages and there have been a number of strikes recently, from Chile to South Africa. Lastly, while higher prices for gold are undoubtedly good news for companies which produce the yellow metal, they tend to extract and process lower grade ore when the price is rising, in order to extend the life of the mine.

I wrote about this in more detail last month and also in June, and you may wish to click on this link for lower grade ore.

Despite these factors, some of which are related to the business cycle, we remain long-term bulls of miners which remain a Fullermoney secular theme due to the commodity supercycle. Lastly, the NYSE Arca Gold Bugs Index has shown relative strength during the recent stock market sell-off, although it has a lower rally high as did some other previously ranging stock market indices which broke downwards recently.

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