Why You Should Avoid Barrick Gold Corp. as Oil Declines

Gold stocks like Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) may look tempting as oil declines, but you should stay far away.

| More on:

As energy stocks are getting beaten up, many investors may be tempted to switch into gold stocks. After all, gold is often what people switch into when they’re most scared. But is gold really a safe place to hide?

Well, not really. Below we’ll take a look at why the oil price slide may be really bad for gold companies, using Barrick Gold Corp. (TSX: ABX)(NYSE: ABX) as an example.

Why cheap oil is bad for the gold price

Let’s take a look at why gold prices have continued to languish in 2014.

First of all, investors have gotten scared by instability in emerging markets. Meanwhile, the U.S. economy has been performing well – GDP grew by 3.5% last quarter, and budget deficits are down — so investors have been buying U.S. dollars. And generally a stronger dollar causes the gold price to go down.

Secondly, inflation has come in much lower than many initially feared – over the past 12 months, core inflation in the U.S. was only 1.8%. And remember, gold tends to do well when people are fearful of inflation.

So let’s take a look at what energy’s fall means in this context. First of all, it will trigger even more instability in many emerging markets. Countries like Iran, Venezuela, and Russia are in particular trouble. Meanwhile, lower gas prices will put much-needed dollars in Americans’ pockets. So low oil prices should help the American economy, and make the U.S. dollar even stronger.

Secondly, low energy prices will help lower manufacturing costs in the United States and around the world. So not only will gas prices be cheaper, but the price of other products will be held back too. In other words, inflation should be held in check.

To sum up, the low price of oil does no favours for the gold price.

Is Barrick ready for lower gold prices?

To give Barrick credit, it has done a lot of things right in the past year and a half. Costs have been cut, assets have been sold, and the company genuinely seems to have more discipline.

That being said, the company can’t really afford to have the gold price decline much further. To illustrate, let’s look at what happens if the shiny metal drops to US$1,000 per ounce.

Barrick plans to produce 6.2 million ounces of gold this year, at an average cost of $900. So if gold trades for US$1000, then that’s $100 of profit per ounce, or $600 million in total. Unfortunately, that doesn’t even cover finance costs of $800 million.

Given oil’s decline, Barrick is obviously an extremely risky investment. You’re better off avoiding the shares.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Metals and Mining Stocks

Growth from coins
Stocks for Beginners

Prediction: These Could Be the Best-Performing Value Stocks Through 2030

These stocks should absolutely surge through 2030 and beyond, with demand rising and supply only decreasing.

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

1 Canadian Mining Stock to Buy and Hold Forever

Here’s one of the best Canadian mining stocks you can hold for years to come to benefit from its surging…

Read more »

Businessman holding AI cloud
Metals and Mining Stocks

How Materials Stocks Are Reaping the Benefits of the Artificial Intelligence (AI) Explosion

Barrick Gold (TSX:ABX), Lundin Mining (TSX:LUN), and another TSX materials sector stock could unlock long-term gains on artificial intelligence (AI)…

Read more »

A miner down a mine shaft
Metals and Mining Stocks

Should Investors Buy the Correction in Lundin Mining Stock?

Lundin (TSX:LUN) stock has fallen by 10% in the last few weeks, but so has the price of copper. Coincidence?…

Read more »

Metals and Mining Stocks

Best Stocks to Buy in May 2024: TSX Materials Sector

A TSX materials sector ETF could help investors gain cheap diversified exposure to the hot sector's stocks – so will…

Read more »

Hands protect a sprout in fertile soil.
Metals and Mining Stocks

What’s Going on With Nutrien Stock?

Nutrien (TSX:NTR) stock has seen shares rise higher as the company sees more demand for fertilizer starting up once more.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Metals and Mining Stocks

2 TSX Commodity Stocks With Massive Upside Thanks to Gold Bugs and the Battery Boom

Investing in mining stocks such as Barrick Gold and Lithium Americas can help you benefit from rising commodity prices.

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

Why Shares in This Leading Mining Stock Soared 21% in May

This gold stock has risen higher on the back of gold prices, sure, but there's even more driving shares this…

Read more »