Is it Time to Put Gold Stocks on the Sidelines as Volatility Increases?

Gold stocks like Goldcorp Inc. (TSX:G)(NYSE:GG) took a major hit on Monday as bullion prices fell sharply. Some investors see this as a buying opportunity, while others are more cautious.

| More on:
The Motley Fool

Gold bullion dropped to its lowest price in five years this week, leaving gold investors to wonder if this is a buying opportunity or simply a good time to avoid the sector until a significant recovery takes hold.

Major Canadian gold stocks, like Goldcorp Inc. (TSX:G)(NYSE:GG) took an 12% hit on Monday, prompting Daniel Lloyd of Sui Generis Investment Partners to short the stock, noting that the company’s $500 million annual spend on dividends would be better kept in house until the stock price recovers.

Instead, Lloyd prefers Franco-Nevada Corporation (TSX:FNV)(NYSE:FNV), which he says takes the mining risk out of the equation by dealing in gold royalty streaming, so investors don’t have to worry about things like cost overruns and project delays. Still, FNV shares weren’t spared in Monday’s carnage in the gold sector, losing 7%.

Other gold experts, such as New Gold Inc. (TSX:NGD)(NYSE:NGD) Executive Chairman Randall Oliphant, see these kinds of price declines as a buying opportunity. “We believe we’re a lot closer to the bottom than the top,” he told BNN. “By every measure, gold stocks have never been cheaper. The value is there but there’s uncertainty in the price of gold itself. But this isn’t a very representative day, there’s blood on the streets for everybody.”

Oliphant is not alone. In a recent report, Bank of America called gold “undervalued,” suggesting that shrewd traders may be able to swoop in and make a profit if prices stay low.

Over the past week, a number of events and trends have come together to create what looks like a perfect storm for gold, said Colin Cieszynski, chief market strategist at CMC Markets, in a MarketWatch article.

The risk of a “Grexit” has passed for now and political tensions around the world appear to be easing, reducing demand for defensive havens like gold, and leaving the Fed on course towards an interest rate increase later this year.

On Friday China released data on its gold holdings for the first time since 2009; reserves rose by about 60%. That should be good news for gold, but the yellow metal only represents 1.5% of China’s Forex resources, a percentage that has not grown in six years, reducing hopes that China would help save the gold market.

With all this in mind, it’s important to remember that investing in gold is a risky business, and likely will stay that way for some time. Long-term investors don’t like volatility and it doesn’t get much more volatile than this. It’s likely best to avoid gold stocks for the time being.

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 Doug Watt has no position in any stocks mentioned.

More on Energy Stocks

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

bulb idea thinking
Energy Stocks

3 Incredibly Cheap Energy Stocks to Buy Now

Energy stocks are trending upwards on the back of several key factors. And these three continue to be top cheap…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Should You Buy Freehold Royalties Stock for its 8% Yield?

Freehold Royalties is a TSX dividend stock that offers shareholders a forward yield of 8%. But is the energy stock…

Read more »

Muscles Drawn On Black board
Energy Stocks

Is Suncor Energy Stock a Good Buy?

Suncor is on a roll in 2024. Are more gains on the way?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy for its 4.5% Dividend Yield?

CNQ stock is one of the best options out there for dividend growth. But what about value? Let's take a…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Imperial Oil stock is in a precarious position, so what should investors consider as we head nearer to 2025?

Read more »

construction workers talk on the job site
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor Energy stock is trading at its decade-high on uncertainty in the oil market. Should you buy, sell, or hold…

Read more »