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Buying gold miners instead of bullion is not a leveraged gold trade — it is a bet on operational businesses that happen to sell gold. In 2026 the operations are working against you. |
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One Number
Total return on GDX (gold mining ETF) over 20 years, 2006–2025. QuantPedia, Oct 2025, citing academic research Gold returned 373% over the same period. The case for miners is simple: when gold rises, their profits should rise faster. For 20 years the case was wrong. Last year it wasn't. |
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One Argument For 20 years, buying gold miners instead of bullion was a losing trade. Last year it wasn't — and now the question is whether anything has actually changed.For two decades gold mining stocks were one of the worst ways to own gold. Bullion sits in a vault and needs no maintenance and no reinvestment. Meanwhile, a gold mine is a depleting asset - every ounce extracted brings the mine closer to closure. Mining companies must explore and drill for new deposits and build new capacity all the time. Each requires significant capital expenditure. The difference between a diminishing industrial asset and a store of value is the gap the 26% figure reflects. For most of gold’s history, its price was set by jewellery buyers, industrial users and central banks. That changed in 2025 when financial investors became the dominant force. Demand rose by 990 tonnes in 2025 compared to 2024, while jewellery and industrial demand decreased by 620 tonnes, according to World Gold Council. Meanwhile, investors, according to JPMorgan, held 2.8% of assets in gold by late 2025, about double the allocation of a decade earlier. Financial buyers’ response to macro fears drove the gold price up approximately 50% in 2025. For most of the decade before 2025, sector average AISC (All-In Sustaining Cost - the gold industry’s standard measure of what it costs to keep a mine producing) ran at about 64% of the prevailing gold price, resulting in an operating margin of 36%. Operational leverage finally worked in miners’ favour in 2025. Gold prices surged faster than costs could follow. To illustrate, if a miner's AISC is $1,500 per ounce and gold trades at $2,500, the margin is $1,000. If gold rises to $3,000 — a 20% move — and costs stay at $1,500, the margin becomes $1,500. The metal moved 20%. The margin moved 50%. That amplification is operational leverage. The S&P Global Mining index increased 126% during the year, compared to a 50% increase in gold bullion, according to FT. There is one cost inside AISC that does not stay fixed when gold rises. Royalties are charges levied by governments on mining companies, typically at 3% to 5% of revenue, depending on jurisdiction. The mechanism that worked in investors’ favour in 2025 began to work against them in 2026. This happened not because the mines were running worse but because the royalty structure carries an automatic cost when gold prices are high. According to Barrick, the full-year 2026 AISC is expected to increase to $1,760-$1,950 per ounce. Royalties are expected to account for approximately 60% of this cost increase in 2026, according to Agnico Eagle guidance. Even at the current and forecast cost levels margins remain historically wide. If gold prices hold efficient operators in low-royalty jurisdictions still have room to outperform. Goldman Sachs expects the year-end gold price to be $5,400 per ounce, Deutsche Bank $6,000, UBS $6,200 and JPMorgan $6,300. At any of these levels the spread between gold price and AISC remains wide enough to generate exceptional margins. According to FactSet, the average EPS of mining companies is still expected to increase 8% in 2026.
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One Position A combined “gold allocation” that mixes bullion and miner exposures is not a position. It is two different bets with different risk profiles. Managing them as one is where the losses will come from in 2026. This position reverses if the GDX/GLD ratio continues expanding through Q3 2026. This would indicate a structural rather than a cyclical adjustment. If gold stays above $5,000 but your mining allocation underperforms again this year, will you know why — or will you be waiting for your adviser to explain it to you? |
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