The question is: what goes first - gold price, earnings of a provider of mining equipment or maybe earnings of a mining company?
Well, the intuition is that during a down cycle:
- the price of gold goes down
- the earnings of a mining company go down
- revenue and earnings of a provider of equipment go down
However, it is not that simple. Look at the charts below, starting from the upper one (in this example I have chosen Newmont Mining as a company representing the entire mining sector):
As the charts shows, the sequence is as follows:
- gold prices go up
- then, at some stage of a bull market in gold, the earnings of a miner start going down
- some time later the earnings of Caterpillar start going down as well
- then gold prices start going down and a bear market in gold begins
Quite interestingly, it is not the price of gold that determines a business cycle in the resource sector. As the charts show, it is a miner's performance that initiates the whole cycle (leading indicator). Caterpillar's earnings (I mean its Resource Segment only) and the price of gold are lagging indicators.
Another interesting thing - despite gold prices going down, since the end of 2014 the earnings of Newmont Mining have been going up.
Will Newmont's earnings be a leading indicator once again?