Blockbuster Caterpillar Earnings Prompt a Rally in Precious Metals

Brittney Barrett  |

Rumors surrounding the strength of Caterpillar Inc. (CAT) sales have been circulating for some time, helping to bolster shares of the company by over 25 percent this month. That momentum continued today after the company released third quarter earnings that revealed soaring precious metal prices have helped double sales of mining equipment for the period. Backlogs have also reached a record high, according to the Monday report.

Shares of Caterpillar sunk earlier this fall alongside fears of a double dip that led to panic selling. The slowing global growth rate stoked concern that the price of commodities would tumble and negatively impact the bottom line for Caterpillar, but the company’s seemingly recession proof performance and the strength in commodities pricing is causing investors to reassess that sentiment.

Shares of Caterpillar have dramatically outperformed the S&P for the month while profit for the company far surpassed the year-ago period. In the third quarter of the year, Caterpillar reported a profit increase of $1.14 billion, equaling $1.71 a share. During the same period in 2010, those numbers came in at $792 million or $1.22 a share. Revenue also added sharply, reaching $16.72 billion from $10.45 in the year-ago quarter.

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The equipment manufacturer seems to feel the demand will continue on the basis of increasing demand for commodities and precious metals from emerging growth overseas in nations like China, Brazil and India. The company also predicts U.S. and European demand will return, albeit more slowly than many would like. Compounding these factors, the population is expected to reach 7 billion this year and much of that growth is coming from emerging economies. The demand, both demographic and economic is being cited as a long-term driver of strength of Caterpillar. For 2012, CAT forecast that  growth in these markets would maintain this year's levels, helping to produce healthy earnings and sales increase of between 10 and 20 percent.

The recent volatility in the market and unsure state of the U.S. dollar could be understood as the impetus for the towering price of precious metals, such as gold. Gold has been on a bull run in 2011 and while futures have retreated some in recent trading, the demand for physical gold as tracked by SPDR Gold Fund ETF (GLD) has been mostly consistent. For the one year period, GLD is up 24 percent and ascended again today in trading.

Caterpillar’s strong earnings seemed to remind investors of the demand for gold and other metals, prompting a rush to the sector. The blockbuster quarter combined with the anticipated resolve for the Euro banking crisis expected within the next two days, supported bullish attitudes that sent trusts of both gold and silver higher.  iShares Silver Trust (SLV), Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners (GDXJ) closed the session higher after an enthusiastic rally.

Miners such as Barrick Gold Corp. (ABX) and Goldcorp. (GG), also rose in the 3-plus percent range. Silver stocks, which have been depleted for much of the year, bounced back even more impressively. Shares of Silver Wheaton Corp. (SLW) and Silver Standard Resources (SSRI) both climbed dramatically in trading.

The success of the world’s largest machinery markers also helped to boost shares of other major equipment manufacturers such as Deere & Co. (DE) and agricultural and equipment maker, CNH Global NV (CNH) during the session.



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