One of the key factors of mining production is energy consumption compared to the price of the end product. I have argued that if oil and gold or silver prices start to unlink or end their correlation in favor of gold, then miners will receive some powerful leverage.
In my blogs throughout the last several months, I have addressed this issue, and it is one of the reasons I have accumulated precious metal shares. This post from July 18 should be read to understand where this is going. The shares have much more leverage than just owning the metals in this scenario. In fact, if oil is dropping, the shares would have great leverage, even if PM prices trended flat
Since mid September it has begun to happen and should be watched. As I wrote in posts throughout the summer, the slingers (specs) have built up enormous long positions in crude oil. In contrast, they have minimal exposure to gold. This trade du jour may be unraveling. A slinger who was long crude oil and short gold is now realizing substantial losses. If margin calls are hitting this trade, things could quickly get very interesting.
WTI crude oil
Charts source: Options Express
I also pointed out earlier in the year that costs for miners were dropping in "Are Mining Costs Dropping for Gold Producers?" This post got a lot dissemination, but the conventional wisdom reaction ranged from "What an interesting chap," (not idea, but chap) to "What a crackpot." I actually now think this trend is accelerating. Currently, I only see one major blogger, Pater Tenebrarum, who is picking up on this development.
As for me, I may be one of the few analyzing this sector who actually asks mining executives questions, such as "Are your drilling expenses dropping?" The answer is "yes," by about 20% so far. If you do a search under "mining costs," you will see story after story about rising costs. That is yesterday's papers. An update on items, such as tires, shows prices are edging lower. One mining company representative told me it gets special offers now as opposed to surcharges. The surcharge days ended a year ago. Labor costs are dropping, especially for technical talent. The great expansion capex bubble of 2010-2012 is in complete bust mode. There will be no demand-side price pressure on this sector for some time.
As Tenebrarum spotted, this trend has been showing up (largely unnoticed) in the miners' quarterly reports, such as Agnico Eagle. At some point and late in the day, the analysts who follow this sector are going to get a wakeup call and will jump on this theme. This is especially the case if the oil-precious metal de-link gathers steam.
In conclusion, the daily trials and tribulations of gold and silver prices are not unimportant, but there are other elements to the trade that should also be watched. Specifically, the cost side. Here the worm has turned. If the reverse correlation of metal prices and input costs widens, Katie bar the doors on the producers and the economics of the late-stage juniors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.