Even though markets have been rough, the proven safe havens — gold and gold miners — have been out of favour this year. While the yellow metal did start the year with some exuberance, it lost sheen on a host of factors later. Shares of Barrick Gold (TSX: ABX)(NYSE: GOLD), the world’s one of the biggest gold producers, have lost 30% in the last three months. They are currently trading close to 52-week lows of $22.
Why gold stocks are falling
Gold prices and gold miner stocks showcase a moderately positive correlation. Thus, as the bullion cratered after hitting US$2,000-perounce levels in late March, gold miner stocks, too, started to decline.
Rising interest rates have been the key reason behind gold’s recent decline. The U.S. Fed has raised its benchmark interest rates to 1.75% so far to tame the record inflation. Higher rates strengthened the domestic currency. In addition, the rising rate fortified the Treasury yields, which weighed on non-yielding gold. So, in search of safe-haven assets, market participants chose Treasuries over gold, which further put downward pressure.
Interestingly, the Fed still sees aggressive rate hikes coming in the second half of 2022. It expects benchmark rates to touch 3.4% by the end of this year. Thus, the policy tightening will likely continue to weigh on gold and gold miner stocks at least in the short term.
ABX stock: Barrick Gold in Q1 2022
Besides the macro picture, Barrick Gold’s weaker quarterly performance also pulled the stock down. Its revenues in Q1 2022 fell 3.5% year over year, mainly due to a 10% fall in production. Its net income also fell from $538 million in Q1 2021 to $438 million in Q1 2022. Barrick Gold will report its Q2 2022 earnings early next month.
Barrick Gold generates 90% of its revenues from gold, while the rest comes from copper. The healthy, diversified production mix plays well given the higher demand for the industrial metal used in the energy transition.
Barrick Gold is not the only miner that has seen a value erosion this year. The correction was seen across the board. Peer B2Gold (TSX: BTO)(NYSE:BTG) stock has also dropped 30% in the last three months. B2Gold, which has its assets in West Africa, reported a 12% earnings drop year over year in Q1 2022.
What’s next for gold stocks?
We all know that markets work in cycles. The bear market is followed by the bull market, and again, the bears dominate. For the yellow metal as well, the cycle could soon upturn with the U.S. recession looming large.
Many economists see a fair possibility of an economic downturn in the next few months, with yield curves inverting. A severe recession might force the policymakers to reverse the stance and roll back the rate hikes.
In that case, the bullion could again take center stage as a safe haven, outfoxing the Treasury yields. Gold miner stocks would then be attractive pockets to be in.
Though Barrick Gold and B2Gold stocks have fallen significantly of late, the weakness does not seem over. Nevertheless, long-term investors can consider jumping onboard after some more downside. These two stocks look attractive in the space, given their steep correction and juicy dividend yields.
