Should You Dump Gold Stocks in Anticipation of the Fed Rate Hike in June?

With a Fed rate hike on the table, what should you do with Barrick Gold Corp. (TSX:ABX)(NYSE:ABX), Yamana Gold Inc. (TSX:YRI)(NYSE:AUY), and Goldcorp Inc. (TSX:G)(NYSE:GG)?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Minutes of the U.S. Federal Reserve’s meeting last month revealed that majority of the policy makers are in favour of increasing interest rates as early as June if incoming economic data remains upbeat. Interestingly, the latest data from April appears to be just that, making the case for a rate hike pretty strong:

  • U.S. industrial production clocked its biggest gains since November 2014, fueled by strong demand for natural gas, electricity, and auto.
  • Retail sales rose 1.3% in April to post its biggest gains since March 2015, driven primarily by strong auto sales.
  • U.S. new home sales shot up to eight-year highs in April, and housing starts came in better than expected, suggesting an uptick in construction activity.
  • U.S. consumer prices shot up at a pace last seen in early 2013, indicating higher inflation–one of the factors supporting a rate increase.
  • Labour markets are improving with the number of jobs rising in April even as unemployment rate remained flat.

Why a higher rate hurts gold prices

A higher interest rate is a headwind for gold for several reasons:

  • It increases the opportunity cost of holding the metal.
  • It boosts the U.S. dollar–the currency gold is denominated in, thus making the metal expensive.
  • It makes zero-interest-paying gold less attractive as yields on money market and debt instruments linked to the U.S. rates improve.

The above factors combined with others pressure gold prices when interest rates go up.

Could gold slump?

While there’s no denying that gold prices drop in rising interest rate scenarios, history reveals that gold also has a tendency to bounce back within months of a rate increase. Gold’s rally since the Fed’s last rate increase in December 2015 is an example.

The point I’m trying to drive home is that while the interest rate is a key driver of gold prices, it isn’t the only one. For instance, the demand for gold from major markets like India and China is largely consumer driven and not investor driven. So any fall in prices of the yellow metal may result in higher demand from these nations and help provide a floor to prices.

Moreover, as a classic hedge instrument, gold may not lose much sheen or gain back any losses quickly, given the growing uncertainty in global markets like China and Brazil.

What should you do with gold stocks?

Gold miners are in a better position than they were before Fed’s December rate move. Miners are improving operating efficiencies like never before by slashing costs while exploiting lower input costs. Barrick Gold Corp.  (TSX:ABX)(NYSE:ABX) and Yamana Gold Inc. (TSX:YRI)(NYSE:AUY) lowered their all-in sustaining costs (AISC) by 24% and 10%, respectively, during the first quarter, while Goldcorp Inc. (TSX:G)(NYSE:GG) saw its AISC drop 6% year over year in Q1.

More importantly, most miners have been conservative in their outlook, perhaps factoring the possibility of a dip in gold prices going forward. Barrick, for instance, is striving to turn free cash flow positive this year at gold prices as low as US$1,000 per ounce. Goldcorp believes it has “more than sufficient” cash flow at current gold prices to fund debt and growth projects and pay a sustainable dividend. So investors will probably not have to hit the panic button on miners’ cash flows even if gold prices slip about 10-15%.

Of course, any speculation or negative news could see gold stocks swing wildly, especially after their massive run up this year. So you can expect better entry points in near weeks. But if you can stomach the volatility, holding on to promising low-cost miners like Barrick–and even buying more on dips–should be a prudent approach for long-term investors right now.

Should you invest $1,000 in Yamana Gold right now?

Before you buy stock in Yamana Gold, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Yamana Gold wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Neha Chamaria has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Metals and Mining Stocks

Man holds Canadian dollars in differing amounts
Stocks for Beginners

Cash Is King? Think Again During Today’s Market Dip

Sure, cash is great, but during a market dip investors may want to consider using some of the cash to…

Read more »

todder holds a gold bar
Metals and Mining Stocks

2 Canadian Dividend Stocks Worth Their Weight in Gold

Agnico Eagle Mines (TSX:AEM) and Barrick Gold (TSX:ABX) are shining stocks on the TSX this quarter!

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

First Quantum Minerals: Buy, Sell, or Hold in 2025?

First Quantum stock is a strong stock, but what about the future of this TSX stock?

Read more »

man touches brain to show a good idea
Metals and Mining Stocks

Tariff Troubles: How Canadian Investors Can Weather the Storm

This market is going bananas over tariffs, but there's one area of the market that can still protect your investments.

Read more »

top TSX stocks to buy
Metals and Mining Stocks

The Best Stocks to Invest $1,000 in Right Now

Investing in undervalued TSX stocks such as New Gold should you deliver outsized gains in 2025 and beyond.

Read more »

Man data analyze
Metals and Mining Stocks

Trump Tariffs Send Copper Prices Skyward: Are Canadian Copper Stocks a Buy Now?

Here’s why Trump’s new auto tariffs are sending copper prices soaring and putting Canadian copper stocks in the spotlight.

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Better Materials Stock: Nutrien vs Mattr?

Nutrien stock still looks like a strong, long-term buy, but so does Mattr. So, which comes out on top?

Read more »

nugget gold
Stocks for Beginners

Precious Metals Are a Hot Commodity Under Trump Tariffs: 2 TSX Stocks to Consider

Gold is looking like a shiny opportunity for investors right now, so should you dive in?

Read more »