Many investors who follow the gold market focus most of their attention on the price of gold bullion. As a commodity, gold prices move up and down every day based on supply and demand. In particular, it’s the major mining companies that determine available gold supply, and their production levels play a key role in establishing price trends in the gold market.
Because the gold market is global, the price that gold miners receive for the gold they produce is largely determined by factors beyond their individual control. What a miner can work on, though, is cutting costs of production as much as possible. If gold prices are at $1,500 per ounce, a miner that can produce gold at a cost of $800 per ounce has a huge advantage over one that has to pay $1,200 per ounce in production costs. In fact, during periods of falling gold prices, miners with high production costs often have to face extended periods of losses. That can eventually cause those more marginal gold miners to go out of business, leaving only those companies with more efficient operations to continue operating.
Gold investors like that mining companies is that their fundamental business performance isn’t always correlated to the ups and downs of the broader economy. Gold prices sometimes rise during periods of economic strain, especially when prices of financial assets start to drop and cause investors in those assets to get nervous about preserving their portfolio value. However, that can cut both ways, and gold miners don’t always go up as much as the rest of the stock market during times of economic prosperity. The idea, though, is that by providing some diversification, gold mining stocks can sometimes help cushion the blow from losses in other holdings during tough times for the overall market.