Investing in precious metals like gold comes with a lot of volatility as its price is driven by fear. Gold is considered a safe haven that hedges against inflation and economic weakness. But this time, gold prices are high at US$1,950, but gold stocks do not reflect the bullish bullion. Why?
Something about precious metal stocks
The gold price is less volatile than gold mining stocks. To give you an idea about the volatility, gold surged 24% between November 2022 and April 2023, while Barrick Gold (TSX:ABX) stock price surged 42%. The dip was even bigger than the rise, as Barrick Gold stock fell 18.5% while gold fell 4% since May.
Gold mining stocks are more volatile because they incur operating costs, project discovery, and de-risking costs, which have increased. Gold exchange-traded funds’ (ETF) major cost is storage; therefore, they are closer to gold prices, but they don’t give dividends like gold mining stocks do.
The current confusion in precious metal stocks
Gold stocks have been falling since May, as macroeconomic indicators are confusing investors. Investors buy gold stocks when the economy shows signs of weakness. The U.S. Fed paused interest rate hikes in June, while central banks of Canada and Europe hiked interest rates. The Fed’s rate hike pause comes as inflation and employment were stable. The Fed did warn of two more rate hikes later. All this can have two meanings:
- Either Fed chair Jeremy Powell paused the rate hike to allow the 5% rate to seep into the economy;
- Or economic figures coming from a rate hike are more concerning, so the Fed decided to pause the rate hike to borrow time to work out the math.
When in confusion, buy the dip. If Powell stays by his word and hikes the rate two more times later, it could act as a catalyst and give you 20-30% capital appreciation. And if the U.S. fails to avoid a recession, then a 60-70% jump is likely.
But if the opposite is true and the economy recovers, you could see a 20% downside. But all the while, you will earn some dividends.
The dividend case of Barrick Gold
If you are bullish on the gold price, you would be better off buying Barrick Gold stock than gold itself, as the former grows more than the physical gold.
Another reason I prefer Barrick Gold stock over a gold ETF is the regular dividend, although the amount varies. Gold tends to react opposite to the economy. When the stock market is bearish, gold is in a bull run and vice versa. In gold’s bull days, Barrick Gold pays a higher dividend, depending on the performance of its net cash.
| Year | Annual Dividend/Share |
| 2023 | $ 0.20 |
| 2022 | $ 0.65 |
| 2021 | $ 0.36 |
| 2020 | $ 0.31 |
| 2019 | $ 0.13 |
| 2018 | $ 0.19 |
| 2017 | $ 0.12 |
| 2016 | $ 0.08 |
| 2015 | $ 0.14 |
| 2014 | $ 0.20 |
| 2013 | $ 0.14 |
| 2012 | $ 0.75 |
| 2011 | $ 0.51 |
| 2010 | $ 0.64 |
| 2009 | $ 0.60 |
| 2008 | $ 0.60 |
The 2008 Global Financial Crisis put Barrick Gold on a dividend roller coaster, as it paid a high dividend for five consecutive years. Those who bought the stock in July 2007, ahead of the recession, saw a 70% jump in their stock price and higher dividend. While high dividends continued until 2012, the stock’s price started cooling in November 2011.
If I were to put the Barrick Gold returns in dollar terms, a $5,000 investment in July 2007 would have bought you 160 shares of Barrick Gold at $31.2/share. If you sold it in the third quarter of 2011, while the stock still traded near its high of $50, your total returns in four years would be $3,376 ($3,000 capital appreciation and $376 in total dividends).
Investor takeaway
But all these returns are only possible if you actively invest and buy the stock at its dip and sell in a bull run. Remember, gold mining stocks are unpredictable as they rally on investors’ fears. Only a contrarian approach can make you money.
