Editor’s note: Originally published at tsi-blog.com on September 29, 2020.
[This blog post is a modified excerpt from a recent TSI commentary]
It is estimated that about 50% of the production costs of the average gold miner are linked to energy. That’s why the gold/oil ratio is a reasonable proxy for the average profit margin across the gold mining industry.
The gold/oil ratio peaked in April of this year and then plunged. Refer to the following chart for the details. It’s a good bet that the April 2020 peak was the major (long-term) variety, since it was driven by a spectacular collapse in the oil price that almost certainly won’t be repeated within the next few years. This implies that the industry-wide gold mining profit margin peaked on a long-term basis during the first half of this year.
For two reasons, the high probability that the gold/oil ratio peaked on