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Analysts seem to be falling over themselves to explain the causes and consequences of the low oil price which is still trading below $60 per barrel as of today. As we are predominantly focusing on the precious metals sector, we are obviously very interested to see what the effect of a lower oil price is on the price of gold and the financial performance of gold mining companies.

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If we look at the charts, the gold/oil ratio has increased incredibly fast to a ratio of around 22, coming from just 13 in early October. The Relative Strength index shows the ratio to be in an ‘overbought' territory which could very well mean that the ratio will come off a bit, either by a lower gold price (not  very likely) or an increase in the oil price (which is already more likely).

This isn't a unique situation though. Even though the oil price is indeed trading at its lowest level in approximately five, six years, we don't have to look that far back in time to find a higher Gold/Oil ratio. Just two years ago, at the end of 2012 we also had a ratio in excess of 20, so the 2012-2014 period could be seen as an abnormality which can be seen on the next chart as the Gold/Oil ratio has been trading at its lowest point in six years time.

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As gold-focused analysts, we are obviously also extremely interested to know the impact of this oil price on the production cost of gold. And that's where we enter dark and unexplored territory as there's virtually no information about this topic. That's understandable as every mine has its own needs depending on a zillion of factors of which the most important factor obviously is whether or not the mine is located close to a ‘civilized' area.

As the average energy consumption to produce a kilo of gold is between 150 and 300 Gigajoules , the mining sector obviously is a sector with an extremely high consumption of energy and the fate of a project could be decided by whether or not it could be hooked up to an existing power grid. This has obviously put companies operating in remote areas at a disadvantage compared to other mining operations. Agnico Eagle's Meadowbank mine in Nunavut, for instance, has no access to the power grid and all diesel fuel needs to be hauled in. At a consumption rate of 200,000 liters of diesel per day, you'd think the impact of a lower oil price would be noticed by Agnico Eagle. This is theoretically true, but as the mine is operating quite far up north, the company needs to make sure it has a sufficient amount of fuel before the winter kicks in. As the oil price only started to slide in October, it sure looks like Agnico has purchased its ‘winter fuel' for the Meadowbank mine right before the oil price crash and is stuck with the higher cost fuel.