High oil prices are squeezing the profits of oil companies who are already battling the headaches of high labour cost and higher taxes. And with gold prices stabilizing at the same time, some producers may just fell the heat until the yellow metal resumes its bull trend.
The high volatility in oil prices have forced gold companies to hedge their oil needs. Even the world's biggest gold producer- Barrick Gold- had to hedge oil prices considering the uncertainty in the markets. “As the oil spike relates to our cost structure, we've got things under control. But as far as what an oil price rise means to the broader economy, obviously we have some concerns there”, Reuters quotes Barrick CEO Aaron Regent.
Some analysts argue that high oil prices can dent the profits of gold miners even if gold climbs. And as the producer is forced to mine for lower grades, the company yields lower gold for every processed rock with energy costs remaining the same- and this situation of lower yields and higher input cost will inevitably lead to lower profits for the gold mining companies.
The market seems to have picked up on the reasoning as well as gold stocks have constantly underperformed gold prices for most of the gold's bull market- a period when input costs like energy, labour and other prices have been rising as well.
Chart showing performance of Gold (GLD etf) and Gold mining companies (GDX etf)
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