The markets in a gold rush – overheated rally or brilliant opportunity?

In a world that is stumbling from one crisis to the next, for many safety-oriented investors there is no way around the oldest currency in the world: gold. This is also reflected in the price of the precious metal: it has doubled in less than two years and broke through the historic mark of 4,000 dollars per ounce for the first time at the beginning of October. Even though the rally has recently taken a breather, the markets are still keeping a close eye on the gold price.

What are the further prospects for the gold market and what opportunities do investors have to participate in its development? Daniel Feix, Managing Director of Impact Asset Management, and Andreas Böger, Fund Manager of ERSTE STOCK GOLD, recently gave their assessment during a capital market background discussion.

Gold is traditionally considered a safe haven for institutional investors: it is not tied to any particular currency or nation and has steadily increased in value over time. Although, unlike securities, this coveted precious metal does not offer any returns, its low risk has secured it a place in many investment portfolios

Rising gold price despite higher interest rates

In an environment of falling interest rates and geopolitical uncertainty, gold has always been particularly sought after as an alternative investment. However, Daniel Feix emphasises that the current development has some peculiarities. In the past, the gold price would regularly rise when real interest rates were low. However, it would then fall again when interest rates were high. “Since 2022, this formula no longer applies,” as Feix analyses the situation. “Despite rising interest rates, the gold price continued to rise.” Most recently, it has – metaphorically speaking – exploded, gaining more than 50% in the year to date alone.

Correlation between interest rate levels and gold price

• Low real interest rates -> rising gold prices (historically)
• High real interest rates -> falling gold prices (historically)

The reasons for the gold rush

Economists around the world are concerned about the debt levels of industrialised nations. While France and the United Kingdom stand out negatively in Europe, many are particularly concerned about the financial development of the United States. The USA currently has debt outstanding of USD 37.8 trillion, which corresponds to a debt ratio of 125%. As a consequence of this development, central banks have significantly increased their gold reserves in recent years in order to reduce their counterparty risk and diversify their reserves – a sign of the growing role of the precious metal as a store of value and protection against inflation. However, investing in gold also comes with risks.

Another reason for the sharp increase in the gold price lies in the US sanctions against Russian foreign exchange reserves following the attack on Ukraine. These sanctions had little effect, as Russia was able to draw on its extensive gold reserves. Other countries, including China, drew their own conclusions and also increased their gold purchases – with noticeable consequences for the gold price.

Most recently, a psychological factor has also come into play as a price driver: many investors have jumped on the bandwagon so as not to miss out and to participate in the current gold rush.

For the time being, there is no end in sight to this development. Many experts and analysts believe that the gold rally could continue. Daniel Feix also shares this view. In times of rising government debt, declining confidence in national currencies, and a world full of multi-pronged crises, the precious metal remains an attractive safe haven, he believes.

Why gold companies are shining now

An interesting aspect for institutional investors: in the shadow of the rapid gold price rally, companies operating along the supply chain of the world’s oldest currency are also benefiting from the current gold rush.

Andreas Böger, fund manager of ERSTE STOCK GOLD, points out a special “gold nugget effect” for the shareholders of these companies in this context: “While the price of gold has risen from about USD 1,100 to over USD 4,000 per ounce over the past ten years, production costs have only increased moderately from about USD 1,000 to USD 1,600. As a result, the industry’s operating margin has soared to a record level.”

In addition to investing in physical gold, such as gold bars, gold coins, or jewellery, investors may also want to consider gold shares as an alternative. “Gold shares offer access to various segments of the value chain and can serve as leverage when prices rise,” Böger emphasises. Please note: investing in securities involves both opportunities and risks.

The leverage effect of gold mining equities is that rising gold prices can have a disproportionate impact on profit margins, depending on the development of production costs. “Recently, these factors have led to a significant increase in profit margins,” Böger explains. However, this leverage effect can also have a negative effect if the gold price falls or production costs rise.

Focus on medium-sized producers

Many analysts are focusing on medium-sized producers in particular, as they are often more agile and experience stronger growth than large index heavyweights. The valuation for these “gold nuggets” is historically attractive: the average price-earnings ratio (P/E) for the sector has fallen from 25–35x (2014) to 10–15x (2025) (source: Bloomberg).

The ERSTE STOCK GOLD fund pursues an active allocation strategy across various segments of the gold sector and adapts to the market phase prevalent at the time. The focus is on medium-sized gold producers. The portfolio is complemented by the addition of developers, explorers, and royalty/streaming mining companies. The weighting is currently about 80% gold and 20% silver.

When asked about the fund’s investment focus, fund manager Andreas Böger highlights companies with strong management, good growth prospects, and solid fundamentals. “At the same time, we avoid investments in large index heavyweights, companies with very high gold production and problematic growth prospects,” he explains.

A look at the fund’s performance over the past ten years shows that this strategy has yielded positive results in the long term. However, past performance is no reliable indicator of the fund’s future performance.

Risks that need to be considered

In addition to the opportunities, it is also important to be aware of possible risks. Investments in the gold sector can be subject to considerable fluctuations in value. In addition to the sectoral risk, there are issuer risks, exchange rate risks for foreign currency exposures and operational risks. A loss of capital cannot be ruled out.

 

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