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TSX Gold Stocks: Buy on Market Volatility?

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Is there more volatility ahead for the Toronto Stock Exchange? A second COVID-19 wave could send corporate profits falling further in a global recession. Upcoming U.S. elections will also impact global markets.

The S&P/TSX Composite Index is still down 5% for the year. Finally, the index has flattened this month, possibly signalling stronger months ahead for the stock market.

Energy and financial stocks have yet to recover market value from the March selloff. Mortgage deferrals are still weighing on the big Canadian bank stocks. Meanwhile, investors still feel uncertainty surrounding the tense geopolitical environment that impacts crude oil prices.

COVID-19 heavily influenced both these sectors this year.

Given all the volatility, is it time to invest in TSX gold and mining companies? These stocks have done fairly well this year and could continue this trend into the second half of 2020.

Should you invest in TSX gold stocks?

Precious metal stocks can quickly become overvalued and then fall. If you enter these stocks at the wrong time, you could lose a lot of money.

Gold costs over US$1,850 per ounce now. When gold was trading at US$1,900 per ounce 10 years ago, the price fell to $1,200. Companies like Barrick Gold (TSX:ABX)(NYSE:GOLD) didn’t do well after that.

Precious metals tend to go up during times of pessimistic economic outlooks. The COVID-19 pandemic is wreaking havoc on the economy, which is why gold has done so well this year.

Nevertheless, another quick drop in the price of gold might just be around the corner. When that happens, these gold and mining stocks will fall in value along with the asset.

Barrick Gold earnings guidance

Barrick released earnings guidance on the company’s production figures. Last quarter, the firm produced 1.15 million ounces of gold and 120 million pounds of copper.

COVID-19 delayed production in some facilities like Barrick’s Veladero mine in Argentina.

While Barrick can sell its gold for higher prices today, what about tomorrow?

My only concern about investing in this TSX stock is the volatile price history. Further, Barrick doesn’t normally outperform the S&P index. Year to date, the stock is up 58% versus the 5% decline in the S&P/TSX Composite Index.

ABX Chart

There’s a lot of risk involved in buying gold and mining stocks at 52-week highs. That’s not a potential mistake that I am personally willing to make, especially for a 1% dividend yield.

Miss out on profit or avoid losses?

Investors always face a crucial question whenever deciding to purchase an asset. Do I care more about missing out on profit or avoiding losses?

Your investment style and risk preferences determine your answer.

If your risk preferences are higher, then you might care more about missing out on a potential profit opportunity than avoiding losses.

On the other hand, investors with fewer savings might care more about avoiding losses. These investors would prefer to conserve their capital because it is scarcer.

No investment comes without some risk. That said, before you invest in TSX gold stocks, know your risk preferences and whether conserving capital is more important to you than missing out on profit that you may never see.

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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 Debra Ray has no position in any of the stocks mentioned.

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