Toronto-headquartered Barrick Gold (NYSE: GOLD) is involved in the production and sale of gold and copper, in addition to resource exploration and mine construction. The company’s operations span 13 countries across North and South America, Africa, Saudi Arabia, and Papua New Guinea. It owns a 61.5% share of the largest gold mining complex in the world – Nevada Gold Mines – and is the largest gold producer in Africa. Clearly, a mining stock to watch as a potential future addition to my portfolio.
Unsurprisingly, the company’s share price mirrors volatility in the gold market. So what’s moving the price of gold? Given the cost and time involved in exploration and mine construction, the year-on-year change in gold supply is unlikely to fluctuate notably. Consequently, price is driven mainly by demand and macroeconomic conditions. As economic conditions worsen, the price of gold often rises because it is seen by some as a ‘safe-haven’ investment, and a hedge against inflation.
Accordingly, the Covid-19 pandemic drove up the price of gold in 2020 to a peak of $2036.58 per ounce in August. And the average price in 2020 was 25% up on that in 2019. That this volatility was owing to economic uncertainties is evident from the fact that consumer demand in 2020 was down on 2019. The World Gold Council reported a 34% drop in gold jewellery sales in China and India – countries that are collectively responsible for half of all such demand globally. This was accompanied by a slow-down in central bank net purchases of gold in 2020, positively impacting mining stock.
All of the buoyancy in the gold market in 2020 translated to a similar rise in Barrick Gold’s share price, peaking at $29.6 in August of that year. However, what followed was a pretty continuous slide, such that the share price had fallen by 37% in a little under six months, reflecting the much less precipitous decline in the price of gold through February 2021. This fall in the price of gold was likely linked to optimism around Covid-19 vaccination programmes and the beginnings of recovery from the pandemic. That was in February.
What’s happened since is something of a reversal in fortunes, as the short-term concerns around inflation look increasingly justified. US consumer prices in March continued their four-month rise, and the rate of inflation is at a two-year high. Further, there have been a number of high-profile side-effect concerns, which have put a dent in the rate of vaccination uptake (with AstraZeneca and more recently Johnson & Johnson in the frame). As pessimism has set in, the decline in the price of gold has levelled off, and is showing signs of resurgence. And in a little over a month, Barrick Gold’s share price rebounded by 19% from its lowest ebb in February to $22.23.
My expectation is that this is an opportunity to capitalise on what might very probably be a short-term spike in mining stock. Do note, though, that in the long term, returns on gold have not compared favourably with the S&P 500 index, so there’s a huge amount of risk involved in choosing when to exit. Being in it for the long haul can offer some level of portfolio diversification. And, of course, there are a number of investment funds that hedge the risk for you.
