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Record gold price and the forthcoming bull run in gold shares
Date:
23. April 2025
While the gold price has reached record highs, investor interest in gold shares remains relatively subdued. However, as the gold price surpasses the USD 3,000 per ounce mark, the resulting boost in profitability for gold producers will become too significant for investors to ignore. Dr Joachim Berlenbach, geologist and portfolio manager at Earth Resource
Investments, shares his insight into why he believes the gold price has not yet peaked – and why gold stocks still hold potential. The upcoming bull run may prove to be a ‘stock picker's world’ for investors.
Dr Joachim Berlenbach: In my opinion, gold is only at the beginning of a longer upward cycle. Powerful forces are currently driving gold price – for example, gold purchases by central banks. In 2024, these amounted to around 1,050 tonnes. This marks the third consecutive year that central banks have bought over 1,000 tonnes of gold. We expect continued purchases by central banks this year too, supported by increasing ‘de-dollarisation’, which is likely to be further fuelled by Trump's tariff wars. On the other hand, private investors have yet to fully embrace gold as a ‘safe haven’ investment and diversification tool. German private investors, for example, hold an average of around 75 grams of gold per capita – a high figure compared to other countries – but the amount has remained relatively stable over the last few years. In contrast, Indians own an average of just 18 grams per capita, despite their strong cultural affinity for the yellow metal. This figure could increase significantly in light of inflation and growing (geo)political tensions. Investments in gold ETFs are also on the rise again.
Why are gold shares not performing as well as the gold price?
That’s not entirely accurate. In fact, many of the major gold producers, such as Barrick or Newmont, underperformed the gold price last year. One of the reasons for this was the high capital costs that mining companies must allocate to growth projects. Many large, ‘mainstream’ producers are also considered ex-growth and need to acquire smaller producers or developers in order to maintain their production profiles. However, some smaller companies have significantly outperformed the gold price. Take, for example, producers like Lundin Gold or Torex Gold, which saw share price gains of over 70 per cent in 2024 - compared to the gold price, which rose by ‘only 25.5 per cent’. In the Earth Gold Fund UI (ISIN DE000A0Q2SD8 AK EUR R), we were also able to significantly outperform the gold price in 2024. The gold bull run we are expecting will likely be a stock picker's world for investors.
Will this trend continue in the future? What are the arguments in favour of gold stocks continuing to perform well?
Let’s take a closer look at how the profit margins of gold producers have evolved with the rise in the gold price to over USD 2,900 per ounce. In my opinion, this development has gone completely unnoticed by investors seeking ‘value’ in the equity markets. While average total costs, including capital expenditures, are rising and currently stand at around USD 1,850 per ounce, profit margins have also increased significantly over the past year. The gold price is rising much faster than cost inflation.
We’ve never seen a free cash flow margin – that is, the difference between the gold price and total costs – of over USD 1,000 per ounce. Yet, the market is largely ignoring this development and seems to assume that the gold price will correct downward again. However, we do not share this view, for the reasons mentioned earlier. Even if we conservatively assume a stable gold price of USD 3,000 per ounce, many shares are currently hugely undervalued. We expect record dividend payouts and share buybacks in the coming quarters. I would be very surprised if this does not convince previously sceptical investors that the gold and commodities sector is one of the most attractive sectors available. Once gold shares start to ‘take off’, this could become one of the most lucrative investment sectors. We therefore continue to see gold shares as an ideal entry opportunity - despite their already good performance.
Especially silver. Historically, silver has always been gold's ‘little brother’ when it comes to investments in precious metals. However, its importance has grown significantly as part of the energy transition. To understand silver’s technical significance, a brief excursion into physics is helpful: silver has the highest electrical conductivity of all metals, making it ideal for use in solar cells, for example. This ensures minimal energy loss and maximum efficiency in electricity transmission. Currently, around 25 per cent of silver production is used in photovoltaics - and this share is increasing. We therefore see silver prices outperforming even gold in the medium term. In my opinion, silver stocks deserve a place in every precious metal portfolio.
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