The gold sector is finally showing signs of life after a multi-year slide that put most of the gold miners off the radar of Canadian investors.
Gold resurgence
The price of gold currently trades at US$1,590 per ounce compared to its 12-month low around US$1,270. Gold briefly topped US$1,600 earlier this month and could potentially break through that level again and take a run at new six-year highs in the coming weeks.
Pundits are even speculating the 2011 highs above US$1,900 could be within reach in 2020, given the numerous financial and geopolitical risks that are driving gold demand.
Recent support is fuelled by fears connected to the coronavirus outbreak in China. This is along with tensions in the Middle East, the China-U.S. trade war, Brexit, and a global trend toward negative rates on government debt.
Global financial markets are reacting to the potential impact of the coronavirus on economic activity. The longer the virus disrupts trade and consumer and business spending, the more likely countries will begin to reduce economic growth targets. As a result, investors are starting to move funds out of higher-risk positions and into safe-haven assets.
The oil market is already pricing in reduced demand. For example, WTI oil is trading at US$51.50 per barrel compared to more than $63 earlier in January and is approaching a 12-month low.
Cash is also flowing into government bonds and driving down yields. The U.S. 10-year treasury yield is at 1.53% compared to $1.91 a month ago. It too is approaching its lowest point in the past year.
In this environment, it isn’t a surprise to see gold catching a bid. The yellow metal is widely viewed as a safe place to protect wealth. This is particularly true for investors who hold the bulk of their money in currencies other than the U.S. dollar.
Gold is priced in the American currency, and there is a risk that central banks around the world will ramp up interest rate cuts to try to boost their domestic economies. This can lead to a global race to devalue currencies, which can erode wealth and undermine purchasing power in the international markets. Holding gold is one way to protect against a devaluation of a currency against the dollar.
Should you buy Barrick Gold?
The medium-term outlook for gold is positive, given the basket of concerns hitting markets. The gold miners tend to move more than the price of gold, so it would make sense for investors who are bullish on gold to consider adding gold stocks to their portfolios.
Barrick Gold (TSX:ABX)(NYSE:GOLD) is up about 50% since the end of May last year, but more gains should be on the way. The company’s CEO recently said that Barrick could effectively wipe out its net debt by the end of 2020 if gold holds its gains. That would be a huge milestone for a company that was on the brink just a few years ago with debt of US$13 billion.
Barrick raised its dividend late last year and the elimination of the debt burden would free up cash to boost the payout. The company currently owns five of the top 10 mines on the planet and had 2019 gold production of 5.5 million ounces. Barrick is also a major copper producer and copper could see a sharp price rise in the coming years, as the trend to renewable energy picks up pace. Wind turbines and solar panels use significant amounts of copper.
Barrick Gold trades at just $24.50 per share. It wouldn’t be a surprise to see the stock top $30 by the end of the year.
