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Despite the ongoing summer slump in precious metals markets, gold prices are still up close to 5% for the year. While not much to boast about in itself, a modest gain is infinitely better than a loss – which is what holders of gold mining stocks are taking.

The flagship VanEck Gold Miners ETF (GDX), which holds a basket of majors including Newmont, Barrick, and Agnico Eagle, is down 4% year to date.

It’s a continuation of a long-term trend of underperformance. Since its inception in 2006, GDX has delivered a dismal total return of -16%. Over that same period, spot gold prices have gained a stellar 200%!

It’s not even close. The difference in performance reflects the fact that these are entirely different asset classes. Even though gold stocks and gold bullion both attract investors who are bullish on spot prices, only the metal itself is sure to gain in a bull market for gold.

Mining stocks are capable of delivering outsized returns in the right conditions. But unfortunately for investors, the mining sector’s woes seem to persist year after year.

At the core of the problem for gold majors is rising production costs and declining production volumes.

Mining equity analyst Adam Hamilton writes:

“Higher outputs boost operating cash flows which help fund mine expansions, builds, and purchases, fueling virtuous circles of growth. Mining more gold also boosts profitability, lowering unit costs by spreading big fixed operational expenses across more ounces. But most of GDX's biggest gold miners continued suffering shrinking output.

That includes mighty Newmont, Barrick Gold, Newcrest Mining, Gold Fields, Anglogold Ashanti, Kinross Gold, and Endeavour Mining. Together commanding almost 3/8ths of GDX's total weighting, these seven huge gold miners produced 4,866k ounces last quarter. Ominously that plunged 8.9% year-over-year, a serious drop for most of the world's biggest gold miners!”

Hamilton notes that all-in-sustaining costs for the largest gold miners are soaring at an annual rate of 7.7%.

The mining industry is financially unsustainable at current spot prices for metals. The only thing that will turn its fortunes around – and incentivize exploration and development of new mines – is higher market prices for what it produces.

It’s true that some smaller operators are faring better in this environment than the majors.

And, as usual, royalty and streaming companies are outperforming – thanks to their superior business models which avoid most cost inflation and operational risks because they take their revenue right off the top.

It’s also true that total global gold production from all sources has so far not shown an annual decline.

But amid growing demand for metals, supply deficits loom for gold, silver, platinum, and palladium. The more pain the mining industry suffers, the bigger those deficits are likely to be.

The same forces that threaten to bankrupt mining companies paint a hugely bullish long-term picture for physical precious metals markets. It’s all about supply and demand.

When gold and silver bull markets do resume in earnest, shares of well-positioned miners will undoubtedly go up as well. Some may even deliver explosive gains. But history shows that run ups in the mining sector tend to be fleeting.

At the end of the day, a mining stock is a financial asset. Its performance depends heavily on factors such as management acumen, the regulatory environment, sentiment on Wall Street, and costs for capital, labor, and energy.

The actual mined and refined product, physical bullion, carries none of these business risks. An ounce of gold is money itself. As such, it can be expected to retain its purchasing power over the longest of timeframes more reliably than any financial asset.

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