But, as I’ll describe below, there are several reasons why Barrick Gold may not be a great hedge. As a result, investors should consider utilizing other assets.
Gold prices fell the week of Feb. 23, driven by investors who had to obtain cash for various reasons. That trend could easily continue or reappear, lowering gold prices and hurting GOLD stock. Gold prices could also be pressured by fewer purchases of physical gold in China.
Coronavirus Fears Appear Overdone
Brendan Ahern, KFA’s chief investment officer who often visits China, says that the markets are exaggerating the impact of the virus. Ahern says that, according to a recent report by the Chinese government, 75% of those who died from the virus in China had pre-existing conditions. He also cites China’s higher smoking rate as a factor in death.
Moreover, Ahern reports that, outside of the province where the virus originated, infection rates have already peaked.
Meanwhile, John Nicholls, a clinical professor at the University of Hong Kong, labeled the virus “a bad cold” which kills people who already have health issues. He added that the virus has a mortality rate under 1% in most places other than China.
The professor thinks that the virus will start to disappear by May as the weather gets warmer. Nicholls’ hypothesis is supported by the fact that, in multiple places that are currently warm, including Singapore, Hong Kong, Hawaii, the Philippines and Australia, the virus has spread extremely slowly or not at all.
So anyone who’s betting on a global panic that will result in the hoarding of gold, akin to the events of 2008, will probably turn out to be mistaken.
Gold Miners Have a Mixed Record During Recessions
It’s entirely possible, maybe even probable, that some major countries will have recessions due to the coronavirus. And the contraction of those economies, along with weakening U.S. consumer spending, could conceivably push America into a mild recession.
But it turns out that gold-mining stocks don’t always perform well during recessions. Further, due to the miners’ volatility, investors have to have pretty good (or lucky) timing to profit from any of them during an economic downturn.
For example, during the 2001 recession, Barrick Gold fell 4.5%, and during the 1990-1991 recession, Newmont Goldcorp (NYSE:NEM) tumbled 19%, badly underperforming the S&P 500 which climbed 4.8%.
During the 2001 recession, Newmont jumped nearly 40%. But investors who bought the stock during a few of its high points during that year would have lost money.
History shows that physical gold is safer than gold miners during recessions. Physical gold usually outperforms the S&P 500 during economic downturns, but is much less volatile than gold miners. The SPDR Gold Shares (NYSEARCA:GLD) exchange-traded fund closely tracks gold prices.
Surprisingly, Chinese oil stocks could be a good hedge against the coronavirus outbreak. According to a Seeking Alpha columnist, during the SARS outbreak in 2002, oil demand in China increased meaningfully because more people drove instead of flying. PetroChina (NYSE:PTR), China Petroleum & Chemical (NYSE:SNP) and China National Offshore Oil (NYSE:CEO) are all Chinese oil companies whose shares trade in New York.
Finally, Gilead (NASDAQ:GILD) is likely to be a good hedge against the coronavirus. There have been indications that its remdesivir drug can help coronavirus patients. The results of a trial are expected at the end of next month, while any vaccine is not expected to be ready for at least a year.
Until a vaccine is ready, governments will likely look to stockpile remdesivir in case their countries suffer an outbreak. Governments, especially the Chinese government, could also keep the drug on hand in case it works against future outbreaks of different viruses.
The Bottom Line on GOLD Stock
Barrick Gold doesn’t appear to be the best hedge on the coronavirus, due to the volatile performance of gold miners during economic downturns. Further, intense fears about the coronavirus look likely to be short-lived. Plus, there are negative pressures on gold prices in the short term.
Gilead, physical gold and Chinese oil stocks look like better hedges than GOLD stock against the virus.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he owned shares of Gilead.