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Gold Mining Margins Will Expand Further

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The commodities that represent mining cost inputs are not only trending bearish but are little threat to move much higher anytime soon.

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Longtime readers know that I am a fan of intermarket analysis. The movement of certain markets influences other markets so it is always wise to analyze a handful of markets rather than just a single market by itself. Several years ago we learned from others before us how intermarket analysis can help us get a handle on the margins of gold (and silver) miners.

Generally, oil (energy) represents about 25% of the cost of mining while industrial metals prices can be a proxy for the costs of trucks, chemicals and blasting agents (like cyanide). It has been a while since we've looked at these spot price charts but with the gold stocks having put in a major bottom it is time to analyze whether it is sustainable or not. Most retail investors would have exposure to gold in something like SPDR Gold Shares (NYSEARCA:GLD), to oil in iPath S&P Crude Oil Index (NYSEARCA:OIL), to mining in SPDR Metals & Mining (NYSEARCA:XME) and to energy in Vanguard Energy ETF (NYSEARCA:VDE)

Simply put, we look at gold relative to oil (bottom) and gold relative to industrial metals (top). These ratios were quite low in 2007 when share prices were driven more so by positive sentiment and high valuations then by positive fundamentals. As you can see, the financial crisis was a major catalyst for the gold mining industry. Gold surged against oil and industrial metals. During the weak recovery these ratios held their ground and are reaching higher levels once again.



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No positions in stocks mentioned.

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