Gold mining can be a terrible business. The metal’s price is volatile. Environmental and political risks are ever-present. And operating costs (especially energy) tend to rise even when gold’s price is falling. The result is a combination of low margins and high risk that causes most miners to consume more wealth than they produce.
But every once in a while the stars line up in a favorable way, and this year looks like one of those times.
First and foremost, gold has been rising and is now at record highs in most non-dollar countries and not far from a record high in the US:
And with the coronavirus gumming up the global economy, the price of oil has cratered, presumably taking diesel fuel down for the ride.
This combination of a higher gold price and cheaper oil will, if sustained in the coming year, give the miners wider profit margins and rising earnings — in some cases spectacularly so.
Positive comparisons are a good thing pretty much anytime, but in 2020 they might make this industry unique. A few current headlines illustrate just how unique:
Apple suffers “doomsday” plunge in iPhone shipments across China
Delta makes deep flight cuts as coronavirus hurts demand, pulls 2020 outlook
The U.S. government just warned people not to travel on cruise ships because of coronavirus
These guys — and many others — are going to report miserable numbers for at least another year. In that kind of environment, headlines like “Gold miner XYZ reports record revenues and earnings, raises year-ahead guidance and boosts dividend” will be fireworks in a dark sky. They’ll attract the attention of momentum investors who don’t much care what a company does as long as whatever it is working keeps working.
In a hyper-leveraged fiat currency world, this kind of hot money dwarfs the trickle of capital that normally flows into gold mining, so expect the industry’s good news to be greeted as actual good news, and their share prices to behave accordingly.