Is It a Good Time to Buy Gold Stocks?

When Warren Buffet sold Barrick Gold (TSX:ABX)(NYSE:ABX), the market took note. Instead of selling, buying gold stocks might prove profitable.

| More on:

Gold is the ultimate store of wealth. We’ve been hoarding the yellow metal ever since we figured out how to extract it from the earth. As an investment, in times of uncertainty, investors flock to the perceived safety of precious metals. In case you haven’t noticed, while markets have battled with uncertainty and the pandemic, gold has quietly shot up in 2020. This has many investors wondering if this is a good time to invest in gold stocks.

Gold stocks are interesting, as their performance is tied to the price of a volatile commodity. In fact, you could argue that gold prices are linked to the level of fear on the market. That hardly sounds like a promising long-term investment, does it?

Let’s take a moment to make the case for one gold miner- Barrick (TSX:ABX)(NYSE:GOLD)

Volatility is (maybe?) still king

When Warren Buffett’s Berkshire Hathaway bought into Barrick, many viewed that investment as a longer-term play given the volatile nature of a market still grappling with a pandemic. In fact, Barrick’s stock surged by double-digits following that move.

That view changed recently, as Buffett slashed his investment in Barrick by 42%. That’s not to say that Barrick isn’t a good investment (more on that in a moment), but it’s more that the Oracle of Omaha has moved on to other investments (i.e., pharma). Coincidentally, November has been riddled with a series of vaccine-related good news.

In short, news of multiple highly effective vaccines has helped stem the uncertainty in the market. This has led the stock to decline by over 20% in the past three-month period. Also noteworthy is that even with that recent dip, Barrick is still up over 20% year to date.

Should you buy gold stocks? 

As intriguing and positive as the vaccine announcements were, inoculating the global population (or at least to herd immunity levels) is something that will take months, if not years. In other words, the volatility we’ve seen will continue for the moment. This, along with lower interest rates and a weak greenback, will drive gold prices higher.

For prospective investors, this is a win-win situation.

Barrick mines gold at a near-fixed cost. That cost is recouped as the metals produced from a mine are sold on the open market. As long as demand for gold continues to grow, so too will the price of the precious metal.

By way of example, in the most recent quarter, Barrick saw operating cash flow come in at US$1.9 billion, reflecting a whopping 80% bump over the same period last year. The miner also posted a record free cash flow generation in the quarter of US$1.3 billion. On an adjusted basis, Barrick earned US$0.41 per share, reflecting a 78% improvement.

In addition to the positive earnings update, Barrick also announced that debt net of cash came in at just US$417 million, which represents a 71% drop over the same period last year. More importantly, this is significant for long-term investors as just a few years ago the company was straddled with billions of debt.

Adding to that appeal is Barrick’s dividend. To be fair, Barrick’s 1.6% yield is hardly the best return on the market, but in the most recent quarter, Barrick did provide investors with its third uptick this year – this time a 12.5% increase.

In short, investors would do well by including gold stocks such as Barrick as part of a larger, well-diversified portfolio.

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 Demetris Afxentiou has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares).

More on Coronavirus

A airplane sits on a runway.
Coronavirus

3 Fresh Stocks I’m Likely Buying in 2025

I am likely buying Air Canada (TSX:AC) stock in 2025.

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Coronavirus

Canadian RRSP Stocks to Buy Now for Retirement

Alimentation Couche-Tard Inc (TSX:ATD) is a quality retirement stock.

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Coronavirus

Retirees: What Rising Inflation Means for Your CPP Payments

If you aren't getting enough CPP, you can consider investing in stocks and ETFs. Canadian National Railway (TSX:CNR) is one…

Read more »

Coronavirus

Air Canada Stock Is Starting to Get Ridiculously Oversold

Air Canada (TSX:AC) has been beaten down to absurd lows.

Read more »

Coronavirus

Should You Buy Air Canada Stock While it’s Below $18?

Air Canada (TSX:AC) stock is below $18. Should you invest?

Read more »

Illustration of data, cloud computing and microchips
Stocks for Beginners

3 Canadian Stocks That Could Still Double in 2024

These three Canadians stocks have been huge winners already in 2024, but still have room to double again in the…

Read more »

Aircraft Mechanic checking jet engine of the airplane
Coronavirus

Can Air Canada Stock Recover in 2024?

Air Canada (TSX:AC) stock remains close to its COVID-19 era lows, even though its business has recovered.

Read more »

A airplane sits on a runway.
Coronavirus

3 Things to Know About Air Canada Stock Before You Buy

Air Canada stock continues to hover below $20 despite the sharp rise in travel demand seen across the industry. What's…

Read more »