Gold vs Gold Miners

When the price of gold goes up, gold miners benefit more than you may inherently think. This is because a mine is leveraged to the price of gold in a way simply owning gold bars isn’t. Despite the immense challenge of running a mining operation, the underlying economics are relatively simple. Costs include the energy, people, infrastructure and equipment it takes to get gold ore out of the ground (and often process it) and revenue is the amount purchasers pay for the gold. For the most part, the cost of extracting the gold does not change when the gold price does, while revenue is directly linked to the gold price. A simple example highlights just how much leverage a gold miner might have to the price of the shiny metal. Let’s say it costs $1,500 to extract an ounce of gold, and the price of gold is $2,000 per ounce. The miner will clearly make $500 for every ounce of gold it mines and sells. Now let’s say the price of gold increases by 50% to $3,000 per ounce. It still costs $1,500 per ounce to get the gold out of the ground¹ but now my pretax profit has increased by 3 times to $1,500 per ounce ($3,000 – $1,500) despite the gold price only increasing 50% (Figure 1).

This example is dramatically oversimplified and misses much nuance, but what naturally follows, is that when the gold price increases, the price of a gold miner should go up even more (all else equal). In the example in Figure 1, a 50% increase in the gold price has led to the mine becoming 200% more profitable. Figure 2 shows what actually happened in 2023 and 2024. Rebasing values to 100 as at the start of 2023, it shows returns for junior gold miners compared with returns of the gold price.

Figure 1

Figure 2