It might seem counterintuitive, but when the price of gold increases, so do the costs of producing it. This is a common dynamic in the gold mining industry. There are a few main reasons for this trend.

One of the primary drivers is royalties. Most governments collect a portion of the profits from gold mines as royalties. In some cases, the royalty rate isn't fixed. Therefore, as the gold price goes up, the royalty rate increases as well, leading to higher costs. Furthermore, financing agreements or legacies from previous ownership structures can also affect these royalties. 

Another major reason is profit-sharing agreements. Many gold mining companies worldwide have arrangements to share profits with their employees. When the price of gold is high, more profit is generated, which in turn leads to larger profit-sharing payouts. This directly increases the company's operational costs. 

Other significant factors are inflation and currency fluctuation. Higher gold prices can sometimes coincide with periods of widespread inflation, which drives up the cost of labor, equipment, and other essential supplies. This increase in operating expenses eventually can result in a higher overall cost of gold production. Additionally, if a country's economy is heavily dependent on gold mining, a higher gold price can cause its currency to appreciate. For a mining company that incurs its costs in the local currency but sells its gold in U.S. dollars, this currency appreciation can lead to higher costs in dollar terms.[1]

Gold mining companies’ performance is influenced not only by the gold price but also by factors such as royalties, profit-sharing obligations, labor costs, and currency fluctuations. These dynamics mean that investing in mining companies provides a different risk-return profile compared to holding gold directly.

For investors seeking exposure to gold itself, rather than to the operational costs of mining, holding gold directly has long been the traditional approach. As the gold market continues to evolve, new products such as XAUm have emerged, designed to provide price exposure to gold in a digital format. In this way, tokenized gold offers an alternative means of accessing gold price movements, without being directly tied to the operational risks faced by mining companies. 

Disclaimer: This content is for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to purchase any digital assets. References to gold market trends are provided for general informational purposes only and do not represent, or imply, the performance, risk profile, or suitability of any specific product or token. Availability of any referenced product may be subject to eligibility criteria and jurisdictional restrictions.

[1] Casanova, I. (2025, June 11). The cost of leverage: Gold miners’ margins matter. VanEck. https://www.vaneck.com/corp/en/news-and-insights/blogs/gold-investing/ima-casanova-the-cost-of-leverage-gold-miners-margins-matter/