Are Gold Stocks the Answer to Canada’s Growing Interest Rate Dilemma?

Interest rates are rising and gold stocks like GoldMining Inc (TSX:GOLD) are rising alongside them.

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Gold prices are on the rise in 2023. Thanks to a combination of high interest rates and an overheated stock market (at least in the U.S.), investors are looking elsewhere to diversify their portfolios. Physical gold bullion is one way you can get some of the beautiful metal into your portfolio. However, it is cumbersome to store, and often sells at a premium to its market price. Gold stocks offer one alternative. Such companies can deliver impressive returns when gold prices go up, and – unlike physical bullion – can pay dividends. In this article, I’ll explore the case for investing in gold stocks in late 2023, and attempt to determine whether it holds water.

Gold prices rising

The most obvious reason for investing in gold stocks this year is the fact that the commodity they sell – gold – is rising in price. Currently, gold trades for US$2,029 in the futures market. Its price is up 6.4% over the last 30 days and 6.9% over the last 12 months. It has been quite a rally. Granted, the price action we’ve seen has only been enough to take gold back to about its peak 2020 levels. Gold rallied that year as investors got nervous about the COVID-19 pandemic’s possible impacts on the stock market. Afterward, when the economy did not collapse, gold began declining in price. This year, it’s up again, possibly because investors are worried about the effects of high interest rates on the stock market.

Interest rates rising

One reason why investors are worried about the stock market this year is because interest rates are rising. The higher treasury yields (the “risk free rate of return”) go, the higher the return and/or dividend yield hurdle a risky investment has to clear before it can be considered worth investing in. Since the start of 2022, interest rates have gone from near-zero to about 5%. This makes stocks yielding less than 5% – whether you’re talking dividend yields or earnings yields – less sensible than they were previously.

Gold stocks: Better than the commodity itself?

If you’re looking for gold investments, you could consider Goldmining Inc (TSX: GOLD). It’s a Canadian gold company that explores for and mines gold in Brazil, the U.S., Canada, and Peru. The gold miner has $171M in cash and equity. It owns 13.4 M oz AuEq in proven resources. GOLD went public in the U.S. in April of this year, and raised $90 million in the offering. It describes its properties as “large and highly prospective.”

In its most recent quarter, GOLD lost money. As a junior miner, it is not yet generating revenue, and it certainly isn’t profitable. However, its stock rallied 31% off its November lows in a very short span of time. If GoldMining starts selling gold and makes decent money off of it, then its share price will likely increase, and increase dramatically if a rise in the price of gold occurs while the company starts selling it. I personally would not buy this stock. If I had to invest in gold, I would buy an established gold miner like Barrick Gold, which is already selling the commodity. However, junior miners like GoldMining Inc show what’s possible with small gold names when the price of gold rises. Perhaps a small speculative position in the stock would provide investors an exciting experience, although I wouldn’t go putting more than 1% of my portfolio in it.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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