To truly understand the gold business, it is crucial to know the relationship that exists between the physical metal and the mining sector which is dedicated to extracting it. Those who do stand to make enormous profits, both from physical gold and mining stocks.

Gold Mining Is One Of The World’s Toughest Industries

Gold mining out of the ground is no easy task. This is because it is both capital and labor intensive. These mines also have a habit of showing up in politically unstable countries, where the leaders have no problem extorting firms that happen to be operating there. Given all these headaches, some might wonder if the effort is worth it, and the answer is yes. Aside from the financial and industrial uses for gold, the stocks of mining companies themselves will perform well when gold rises in price.

Even a small move in gold’s price, up or down, can cause a mining firm to gain or lose significant profits. Miners are especially sensitive to any movements in gold’s price, and as a consequence the mining sector has substantial leverage. The most important thing to recognize about the mining industry is that each ounce of gold that is mined means fewer in inventory. It is the equivalent of a shoe seller that discontinued orders from their supplier because they ran out of money. They sold their existing inventory to get the bills paid, and eventually the shelves ran out of most of their shoes. But if demand suddenly increases, they wouldn’t be prepared for it.

Annually, the mining sector extracts about 110 million gold ounces from the earth. To develop a gold mine usually takes around ten years. Because the industry is currently devoid of investment capital, the business has been somewhat neglected, which means that it has been slow to replace the gold ounces that it has already extracted.

How Investors Can Profit From This Phenomenon

The gold mines which are in production right now are running low on ore. Experts predict that by 2024 the 100 million ounces which have already been produced will drop to below 90 million. It is also believed that the mining industry is not adequately prepared to replace it. What this means economically is that the supply will fall at a time when demand is rising, which means profits for those that own the metal, either in the form of stocks or the physical metal itself. This higher demand will prompt the industry to raise its production levels, but as previously stated, it takes at least ten years to bring a gold mine online. In the meantime, investors can enjoy handsome profits.

A lot of investors are also interested in gold royalty firms. These firms have many of the same advantages as mining stocks, but without the risks. Gold royalty firms don’t produce physical gold itself, but rather, will lay claim on a percentage (the royalty) of any gold that is produced by the miner.