Is It a Good Time to Buy Gold Stocks?

When Warren Buffet sold Barrick Gold (TSX:ABX)(NYSE:ABX), the market took note. Instead of selling, buying gold stocks might prove profitable.

| More on:
gold stocks gold mining

Image source: Getty Images

Gold is the ultimate store of wealth. We’ve been hoarding the yellow metal ever since we figured out how to extract it from the earth. As an investment, in times of uncertainty, investors flock to the perceived safety of precious metals. In case you haven’t noticed, while markets have battled with uncertainty and the pandemic, gold has quietly shot up in 2020. This has many investors wondering if this is a good time to invest in gold stocks.

Gold stocks are interesting, as their performance is tied to the price of a volatile commodity. In fact, you could argue that gold prices are linked to the level of fear on the market. That hardly sounds like a promising long-term investment, does it?

Let’s take a moment to make the case for one gold miner- Barrick (TSX:ABX)(NYSE:GOLD)

Volatility is (maybe?) still king

When Warren Buffett’s Berkshire Hathaway bought into Barrick, many viewed that investment as a longer-term play given the volatile nature of a market still grappling with a pandemic. In fact, Barrick’s stock surged by double-digits following that move.

That view changed recently, as Buffett slashed his investment in Barrick by 42%. That’s not to say that Barrick isn’t a good investment (more on that in a moment), but it’s more that the Oracle of Omaha has moved on to other investments (i.e., pharma). Coincidentally, November has been riddled with a series of vaccine-related good news.

In short, news of multiple highly effective vaccines has helped stem the uncertainty in the market. This has led the stock to decline by over 20% in the past three-month period. Also noteworthy is that even with that recent dip, Barrick is still up over 20% year to date.

Should you buy gold stocks? 

As intriguing and positive as the vaccine announcements were, inoculating the global population (or at least to herd immunity levels) is something that will take months, if not years. In other words, the volatility we’ve seen will continue for the moment. This, along with lower interest rates and a weak greenback, will drive gold prices higher.

For prospective investors, this is a win-win situation.

Barrick mines gold at a near-fixed cost. That cost is recouped as the metals produced from a mine are sold on the open market. As long as demand for gold continues to grow, so too will the price of the precious metal.

By way of example, in the most recent quarter, Barrick saw operating cash flow come in at US$1.9 billion, reflecting a whopping 80% bump over the same period last year. The miner also posted a record free cash flow generation in the quarter of US$1.3 billion. On an adjusted basis, Barrick earned US$0.41 per share, reflecting a 78% improvement.

In addition to the positive earnings update, Barrick also announced that debt net of cash came in at just US$417 million, which represents a 71% drop over the same period last year. More importantly, this is significant for long-term investors as just a few years ago the company was straddled with billions of debt.

Adding to that appeal is Barrick’s dividend. To be fair, Barrick’s 1.6% yield is hardly the best return on the market, but in the most recent quarter, Barrick did provide investors with its third uptick this year – this time a 12.5% increase.

In short, investors would do well by including gold stocks such as Barrick as part of a larger, well-diversified portfolio.

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 Demetris Afxentiou has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares).

More on Coronavirus

movies, theatre, popcorn

How Much is $1000 in AMC Stock Worth 1 Year Later?

AMC was once a stellar growth stock, but it’s taken a serious hit. So how much is $1,000 worth a…

Read more »

Airport and plane

Air Canada Stock Could Keep Trading Weak as Challenges Mount

Should you buy AC stock?

Read more »

Arrow descending on a graph

Why Cineplex (TSX:CGX) Stock Fell to 2-Year Lows Last Week

Is the recent correction in CGX stock really an opportunity?

Read more »

Business success with growing, rising charts and businessman in background

1 Growth Stock Every Canadian Investor Should Consider Right Now

This growth stock saw shares pop 10% on June 20, as one analyst stated there is a significant opportunity to…

Read more »

Aircraft wing plane

Bombardier Stock Merge: What it Means for Investors

Bombardier (TSX:BBD.B) stock went through a reverse stock split on June 13, turning 25 shares into one in one swift…

Read more »

Aircraft wing plane

Air Canada (TSX:AC) Stock: Ready to Take Off?

While Air Canada is handling what it can control really well, there are many worsening macro headwinds that will likely…

Read more »

rail train

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Biotech stocks

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »