Is it Time to Grab TSX Gold Stocks at Their Multi-Year Lows?

Gold stocks generally outperform in falling markets. However, this time, it’s different.

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It’s not just tech stocks that are down this year. The traditional safe-haven gold and gold miner stocks have also been terribly weak in 2022. And notably, even when a significant economic downturn seems to be approaching, gold has not shown any enthusiasm. TSX gold stocks have dropped around 15%, mimicking the fall in TSX stocks at large.

Why gold stocks are down in 2022

Gold has almost always been perceived as a safer investment than growth stocks like tech names or energy. Market participants take shelter in the yellow metal and allied stocks when markets turn uncertain. However, this time, it’s different. Gold has been equally weak amid rising rates and has dug a deep hole in investors’ pockets this year.

The yellow metal changed course, as the interest rate-hike cycle began in April this year. When interest rates rise, Treasury yields rise in tandem, making gold — non-yielding bullion — an unattractive investment. As a result, it has dropped 20% since April, taking gold miner names with it.

The U.S. Fed has increased its benchmark interest rates to 3.25% this year, which has sent the U.S. 10-year Treasury yields close to 4%. So, when investors can earn 4% virtually risk-free, other investment options like gold have to lose their sheen.

Top TSX gold stocks

Canadian top gold mining stocks Barrick Gold (TSX:ABX)(NYSE:GOLD) and B2Gold (TSX:BTO)(NYSE:BTG) have been notably weak this year. Both have lost 20% so far and are trading close to their respective three-year lows.

So, does it make sense to grab these beaten-down names at current levels?

Probably not! To understand why we might have to dig a bit on the inflation front.

The U.S. Fed has been increasing rates in 2022 to tame runaway inflation. It has been in the range of 7- 8%, a four-decade high, for the last couple of months. Although it somewhat decelerated in August, the level is still concerning to policymakers. It is way beyond the Fed’s long-term targeted level of 2%.

And that’s why the Fed might continue to raise rates until the roaring inflation comes under control. The recent aggressive hikes sent a strong signal to markets. We could see steep hikes of three or four quarter-point increases in the next few meetings as well.

As a result, the U.S. dollar and Treasury yields will likely become stronger, weighing on the bullion. TSX gold stocks could follow and could lose more of their value. So, it could still take time for gold stocks to change their course.

TSX gold stocks: Why it’s prudent to wait

Barrick Gold intends to produce roughly 4.3 million ounces of gold in 2022. It produces both gold and copper, which plays well for its diversified revenue base. Mining is a capital-intensive business, and many companies have bloated balance sheets. However, Barrick has a negative net debt and a strong liquidity position, making it a fundamentally appealing name.

B2Gold mainly operates in West Africa and aims to produce a million ounces of gold in 2022. It is one of the cheapest names from a valuation standpoint among peer TSX gold mining stocks. Apart from the valuation, it offers juicy dividends yielding 5.6%.  

So, it is sensible to watch these names closely for the next few months. As inflation calms, the rate hike cycle will invert, and gold will likely gain sheen again. So, grab these names when their valuations become more attractive, probably early next year.

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.

The Motley Fool recommends B2Gold. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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