Alert: China Could Be on the Verge of a Financial Meltdown

China faces a potential economic mess, and Barrick Gold (TSX:ABX)(NYSE:GOLD) could be a safe haven.

| More on:
warning or alert

Image source: Getty Images

Dark clouds are looming over China’s economy. The country’s largest real estate developer Evergrande is on the verge of bankruptcy. For context, this is the largest property developer in a country where real estate accounts for 28% of the economy. Evergrande’s bad debts are larger than Lehman Brothers at the height of 2008. This could be China’s “Lehman moment.”

An economic crisis in the world’s second-largest economy could have ripple effects. Or the damage could be limited to China. It’s too early to say. But if you’re concerned, you may want to consider adding some exposure to gold stocks for protection. Here’s what investors need to know. 

What’s happening in China?

Protests are rare in China, so the fact that a crowd has gathered to chant “Evergrande, return our money,” at the company’s headquarters is noteworthy. The company is unable to meet its debt obligations, which has left investors and property buyers holding the bag. The stock is down 90% from last year. 

A default of this size is likely to spread. The Shanghai and Hang Seng indexes have been steadily dropping since mid-June. One Chinese billionaire lost US$27 billion (CA$34.30 billion) this year! 

The fact that China’s central bank or government hasn’t stepped in yet to offer relief is concerning some investors. Debt crises in major economies could go global, as we say in the 2008 crisis. During that crisis, one asset class served as a safe haven: gold. 

Gold stocks for safety

The price of gold is a buffer for economic pain. When stocks and real estate crash (as they did in early 2020) gold skyrockets (which it did in early 2020). Similarly, the price of gold nearly tripled from 2006 to 2011 during the Global Financial Crisis. That’s why adding gold exchange-traded funds or gold miner stocks like Barrick Gold (TSX:ABX)(NYSE:GOLD) could be a good idea right now. 

Barrick Gold stock is down by about 20% year to date. The selloff coincides with the decline in gold’s market value over the same period. But the company has strong fundamentals, and the stock is undervalued, even if gold remains stable.

For the first six months of the year, Barrick Gold’s net earnings have amounted to more than $1 billion. Additionally, the company’s total revenues have totaled $5.85 billion, backed by a profit margin of about 17%.

With gold prices averaging between US$1,700 and US$1,900, Barrick gold remains well positioned to generate significant returns from its gold reserves. While the cost of production may increase, putting pressure on profits, those costs would likely be offset by rising gold prices.

Bottom line

China’s economic struggles and the risk of global contagion make gold an attractive asset for investors looking to hedge their portfolios. Gold miners should certainly be on your radar right now. 

At the moment, Barrick Gold looks undervalued, as the stock always moves more than the precious metal price. Additionally, the stock is cheap, as it is trading with a price-to-earnings multiple of 13. Therefore, the 20% pullback presents an opportunity to buy the stock at a discount. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

Retirement plan
Dividend Stocks

Planning for Retirement? Here Are the Best Canadian Dividend Stocks to Buy

Buying two of the best Canadian dividend stocks now for the long term can help you retire without financial worries.

Read more »

investment research
Dividend Stocks

A Dividend Giant I’d Buy Over TD Bank Stock

Energy and financials are the TSX’s sector heavyweights, but I’d choose a dividend giant in the former over a big…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

2 Dividend Stocks Worth a Permanent Spot in My TFSA

Restaurant Brands International (TSX:QSR) and Berkshire Hathaway (NYSE:BRK.B) are two of my top TFSA holdings that I intend to hold…

Read more »

Increasing yield
Dividend Stocks

3 Canadian Dividend Stocks Offering High Yields and Reliable Income

These valuable dividend stocks offer solid deals right now, with ultra-high yields that will certainly last well beyond this downturn.

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

Best of Both Worlds: 3 Growth Stocks That Also Pay Dividends

Dividend stocks are great until a downturn ends. But luckily, these three dividend stocks also offer a massive amount of…

Read more »

Payday ringed on a calendar
Dividend Stocks

Monthly Passive Income: 2 Top TSX Dividend Stocks to Buy in June 2023

Here are two of the best TSX monthly dividend stocks you can buy in June 2023.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

RRSP Wealth: 2 Great Canadian Dividend Stocks to Buy in June 2023

Top TSX dividend stocks are now on sale.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Retirees: 2 TSX Dividend Stocks That Reliably Pay You Cash

With strong underlying businesses, high-yielding dividends, and stable cash flows, these two TSX stocks can be excellent investments to consider.

Read more »