A new gold rush has begun. It’s not a rush for large discoveries of gold in the ground; that’s always underway. The new rush is for stock in gold mining companies as a way to expand control of gold reserves and improve the stock price through economies of scale.

As this article reports, Barrick Gold, the world’s largest gold producer, has launched a hostile takeover of Newmont Mining, the world’s second-largest gold producer. This comes at a time when Newmont Mining itself is proceeding with the acquisition of Goldcorp, the world’s fifth-largest gold producer. If both deals close (which seems likely) the result will be a mega-merger of three of the five largest gold producers in the world.

There are customary corporate finance reasons for these mergers including economies of scale, diversification of assets by country and higher share prices as fixed costs are spread over a larger reserve base. But there are also important geopolitical reasons for this gold merger mania.

Barrick is a Canadian company and has close relations with the Chinese government through its executive chairman, John Thornton. While China does not control Barrick, the close relations combined with Barrick dominance of Newmont and Goldcorp gives China the inside track on future output from the new gold behemoth with minimal interference by the United States.

The important news for investors comes not just from this mega-merger but also from a series of mergers in small and medium-sized companies seeking the same benefits and economies as the big players. Global gold output has flatlined for the past five years, even as gold prices have rallied and demand remains strong.

When it’s hard to find new gold in the ground, the easiest way to expand output is to roll up the competition. We expect this gold merger frenzy to continue in the year ahead.

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