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Can the Rally in Canadian Gold Stocks Last?

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Written by Joey Frenette at The Motley Fool Canada

Shares of gold stocks have really picked up meaningful momentum in recent months, thanks in part to the nice run-up in precious metals. Whenever you have gold and silver running hot, there may be a slate of risks that are weighing heavily on investor sentiment.

The bank runs and failures endured through March and April have rocked the confidence of many. Still, regulators rushed in to the rescue. Such prompt action, I believe, may have prevented something far worse. Though a potential regional bank contagion may still be on the minds of many investors, I don’t think now is a good time to chase gold and silver stocks after such a sizeable rally.

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At the same time, it may be wise to consider adding some exposure if you lack any. Precious metals aren’t the most profitable investments to make over the long haul. However, when the market tides go out, you’ll probably be glad you had at least a tiny bit of gold exposure in your portfolio. Some folks may view gold as some sort of insurance policy. I view it more as a diversifier. At the end of the day, it’s always a good idea to be as diversified as possible as a market newcomer.

Gold is a great diversifier

Indeed, the value of diversification may diminish after a certain extent. Regardless, it’s far better to be more diversified than under-diversified if you’re an investing rookie. Later on, as your financial knowledge develops, you’ll be able to gauge how much diversification works for you. Like Goldilocks, you need to find a level that’s “just right.” And what’s right for you may not be right for another investor, especially a big-league money manager who’s looking to outpace the S&P 500 over the medium and long term.

Gold bullion and shares of precious metal miners won’t make you a great deal. So, set your expectations low, and you won’t be in a spot to ditch your precious metal investments at a loss. Gold, silver, and other metals are commodities that are really hard to predict. They can surge when an unforeseen risk off our radars takes centre stage. Similarly, gold can sink when the climate improves, and investors become more willing to reach for some of the riskier securities in the market.

With the U.S. regional banking woes going on and a recession that could hit within the next six months or so, gold may be seen as a place to shelter from extreme levels of volatility.

Barrick Gold: A shining way to play the space

While I dare not predict where gold prices are headed next, I think shares of miners like Barrick Gold (TSX:ABX) are enticing at current levels — as long as you don’t think gold will plunge below US$1,600 per ounce. Indeed, gold miners are more volatile than bullion. However, there’s more upside to be had in a bull-case scenario and a nice dividend to collect while you wait.

The miners can be tough holds during downcycles. However, with gold in rally mode, posting 47% gains since its early November lows, I think gold-light investors have reason to watch ABX stock.

Over a week ago, Barrick clocked in a US$120 million first-quarter profit. That’s down more than US$300 million on a year-over-year basis. Still, as Barrick continues to improve its operations while gold inches higher, I think the risk/reward scenario in the name isn’t all too bad. Just be careful when chasing if gold heats up further. Like anything, gold shares can get too hot to handle.

The post Can the Rally in Canadian Gold Stocks Last? appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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