Is it Time to Put Gold Stocks on the Sidelines as Volatility Increases?

Gold bullion dropped to its lowest price in five years this week, leaving gold investors to wonder if this is a buying opportunity or simply a good time to avoid the sector until a significant recovery takes hold.

Major Canadian gold stocks, like Goldcorp Inc. (TSX:G)(NYSE:GG) took an 12% hit on Monday, prompting Daniel Lloyd of Sui Generis Investment Partners to short the stock, noting that the company’s $500 million annual spend on dividends would be better kept in house until the stock price recovers.

Instead, Lloyd prefers Franco-Nevada Corporation (TSX: FNV)(NYSE: FNV), which he says takes the mining risk out of the equation by dealing in gold royalty streaming, so investors don’t have to worry about things like cost overruns and project delays. Still, FNV shares weren’t spared in Monday’s carnage in the gold sector, losing 7%.

Other gold experts, such as New Gold Inc. (TSX: NGD)(NYSE:NGD) Executive Chairman Randall Oliphant, see these kinds of price declines as a buying opportunity. “We believe we’re a lot closer to the bottom than the top,” he told BNN. “By every measure, gold stocks have never been cheaper. The value is there but there’s uncertainty in the price of gold itself. But this isn’t a very representative day, there’s blood on the streets for everybody.”

Oliphant is not alone. In a recent report, Bank of America called gold “undervalued,” suggesting that shrewd traders may be able to swoop in and make a profit if prices stay low.

Over the past week, a number of events and trends have come together to create what looks like a perfect storm for gold, said Colin Cieszynski, chief market strategist at CMC Markets, in a MarketWatch article.

The risk of a “Grexit” has passed for now and political tensions around the world appear to be easing, reducing demand for defensive havens like gold, and leaving the Fed on course towards an interest rate increase later this year.

On Friday China released data on its gold holdings for the first time since 2009; reserves rose by about 60%. That should be good news for gold, but the yellow metal only represents 1.5% of China’s Forex resources, a percentage that has not grown in six years, reducing hopes that China would help save the gold market.

With all this in mind, it’s important to remember that investing in gold is a risky business, and likely will stay that way for some time. Long-term investors don’t like volatility and it doesn’t get much more volatile than this. It’s likely best to avoid gold stocks for the time being.