In the early hours of Monday, gold reached a new record high of $2,152.30, and silver touched a seven-month peak. This surge marked the culmination of a two-week rally, and while the bulls may be tired now, they won’t be for long. As precious metals are expected to continue their upward trajectory, you might be considering investing in gold and silver miners during this pullback, ahead of the next big rally.
However, a word of caution is in order: many gold miners are likely to underperform gold. In the short term, most gold-producing companies can outpace gold due to leverage. It costs these companies less to mine gold than they can sell it for, and as the gold price increases, this gap between mining cost and selling price expands.
But the long-term picture is different. Most gold miners underperform the metal in the long run. This trend is evident in the chart tracking the long-term performance of the most popular gold miner fund, the VanEck Vectors Gold Miners ETF (GDX), against the performance of gold itself.
Over the past 17 years, gold has risen more than 223%, while the GDX has fallen more than 14%. Despite gold surpassing its 2020 high, gold miners, as a group, have not.
Three key factors explain this underperformance. First, over the long term, inflation erodes gold miners’ profit margins. Rising costs of diesel, equipment, and particularly wages, drive up the cost of mining.
The average all-in cost of mining an ounce of gold now exceeds $1,300, compared to less than $1,000 an ounce in 2020. This one-third increase in costs is a significant reason why their share prices have lagged.
Second, share dilution is a major issue, not just for gold explorers and developers who lack revenue, but also for large mining companies. These companies often dilute shares to raise cash for acquisitions. This dilution is a significant problem because while a mining company’s production may remain constant, if it issues more shares, the profit per share decreases.
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