5 reasons why gold miners make more money than gold investors
Rising commodity prices impact consumers and investors differently. While consumers worry about costs, investors can benefit. Investing in gold mining companies can be more profitable than gold itself due to increased profit margins and debt reduction. Just like oil exploration companies benefit from rising oil prices… gold mining companies too benefit from rising gold prices.
Whenever prices of a commodity rise we often focus on the ill effects it will lead to. For example oil prices. If the prices shoot up then as consumers we worry about how much we will have to shell extra on our next visit to the petrol pump. However, what is detrimental to us as consumers can become profitable too as investors.Why can’t we think of benefiting from rising prices by participating in that trend as investors?
Let me explain. I wrote to you about the rally in more than a month ago. Now gold has rallied to all-time highs recently. Consumers who were planning to buy gold are worried as they will have to shell out more money at the jewelers' shop. But if you are an investor then you won’t be worried.
You could have simply invested in gold and benefitted from rising prices. But there is yet another way in which you can make potentially more money than you would by investing in gold.
Just like oil exploration companies benefit from rising oil prices… too benefit from rising gold prices. Let us dive deeper and see how gold miners make money from the rising prices of precious metals. Here are 5 reasons why they make more money than a gold investor.
Increased profit margins: Rising metal prices incentivize mining companies to ramp up production to capitalize on higher selling prices. Further, as the operational leverage comes into play, the cost of extracting these metals remains relatively stable. As production increases, fixed costs are spread over a larger volume of output, leading to lower average production cost per unit. This means that for every additional tonne of metal extracted, the cost per tonne decreases, leading to higher profit margins.
: When the prices of precious metals surge, it’s like finding a treasure chest for mining companies. They own a lot of these metals in reserve, and when their value increases, the company’s wealth also increases. The higher valuation of reserves can provide a safety net during economic downturns.
: Rising metal prices often encourage mining companies to invest in exploration and development activities. With increased revenues, companies can afford to invest in advanced technologies, explore new mining sites, or expand existing operations.
Mergers and acquisitions: Mining companies may pursue mergers or acquisitions to improve their competitive standing in the industry while also consolidating their expertise. By obtaining a notable stake in smaller competitors and merging with complementary businesses, these companies can broaden their asset portfolio, capture a substantial market share, and achieve cost synergies.
Reduction in Debt
Mining is a capital-intensive business. Mining companies have to invest heavily in acquiring and operating mines. All of this investment doesn’t come through equity. A lot of it comes through debt too. Rising gold prices not only help to improve short-term profit margins but also lead to reduction in debt which is beneficial over the long term.
Gold and silver have been the talk of the town in recent weeks. Last month, I highlighted several reasons why including precious metals such as gold and silver in your investment plan is crucial, be it to hedge the portfolio or for earning turbocharged returns.
However, considering the above points, let’s not forget the unsung heroes behind the scenes: Gold and Silver Mining Companies. So, while gold and silver outperform, it’s the miners who truly strike gold in this lucrative market landscape.
Technical Outlook:
Nifty ended the week on a strong note, closing at 22,514 with a gain of 0.84%. Meanwhile, the Nifty 500 also soared by 2.27%, showcasing the collective strengthening of mid and small-caps. The decline in India's VIX (11.34) a measure of market volatility, enhanced the bulls resulting in a positive market outlook.
Across the sectors supported the rally while Nifty Metal and PSU Bank remain top performers.
Technically, Nifty maintains its position above the 20 Simple Moving Averages (SMA) with the Relative Strength Index (RSI) holding 60 levels.
Technically, a cup with handle pattern appears in the daily timeframe implying a bullish setup. The Fibonacci retracement indicates solid support around the 22,270 followed by 22,200 levels. As long as this pivotal threshold remains unviolated the in the index remains intact.
Despite the weak global cues the domestic market outperformed but this raises a minor cautiousness in the coming days.
