Monday, April 25, 2016

Resource Sector Cycle - Caterpillar's Case

Yesterday one of my readers made a comment about my article on Caterpillar (Harry, thanks). He touched a very crucial issue, called "Business Cycle.

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?

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