Gold Stocks are Falling Heavily in 2022

Gold is often touted as a hedge against inflation and a defensive asset to be used in volatile or falling markets. But with the current inflationary environment and the bearish mood in the stock market, should investors be buying physical gold or gold stocks as a hedge?

Should you use gold as a hedging strategy?

For an asset to be used as a hedge, it must rise in price to offset what it is hedged against and to use gold as a hedge means it needs to rise inline or higher than inflation. Looking at gold prices right now, we know that gold was trading just under US$1,800 an ounce in June 2020 and by August 2020 it had risen to around US$2,000 an ounce, however, more recently, it has been trading back below US $1,800 an ounce.

Over the same period, inflation has risen from 0.7 per cent to 5.1 per cent while the Australian stock market has risen 12.85 per cent since 30 June 2020 to today. Looking at these figures, you would have to agree that gold is neither a defensive asset nor a hedge against inflation.

Since 1 January 2022, the All Ordinaries Index is down just under 12 per cent while gold is only marginally down, which doesn’t support the argument for gold to be used as a hedge although it has been more defensive than holding direct shares. If we look at the 10 largest gold stocks in 2022, we see falls of between 3.37 per cent for Perseus Mining up to 40.59 per cent for Evolution Mining with the average fall just over 22 per cent and all are looking like they will fall further.

There appears to be no identifiable reason as to why gold stocks are falling so heavily and why gold isn’t falling by much but if you have been looking at gold as a safe haven or hedge, you may want to rethink your strategy.

What were the best and worst performing sectors last week?

The best performing sectors included Information Technology up 6.86 per cent followed by Consumer Discretionary up 5.62 per cent and Healthcare up 5.31 per cent. The worst performing sectors included Materials down 0.83 per cent followed by Industrials down 0.08 per cent and Utilities up 0.37 per cent.

The best performers in the S&P/ASX top 100 stocks included Xero up 13.02 per cent followed by Block up 12.48 per cent and Wisetech Global up 11.09 per cent. The worst performing stocks included Orora down 8.26 per cent followed by Lynas Rare Earths down 6.70 per cent and Iluka Resources down 5.47 per cent.

What's next for the Australian stock market? 

The Australian stock market rose strongly at the start of last week rising over 1 per cent but remained flat in the middle of the week. On Friday it returned to being bullish early on before falling away late in the day. While the market trader higher last week by over 2 per cent, it was really a very mixed week.

For the Australian stock market to have any chance of being bullish in the coming weeks, we need to see it rise consistently because at present we are experiencing caution and indecision as it moves higher. I still believe it is too early to tell if the low of 6,581 on 20 June will hold and if the All Ordinaries Index has stopped falling although we will know in the next few weeks.

What is alarming is that retail investors are ignoring the warning signs and buying stocks hoping and, I dare say, praying for them to rise, as there is movement in many speculative stocks as these investors chase short term returns. We are also seeing movement in technology, as well as other stocks that have been hard hit by the downturn as investors continue to speculate. As we know, anything can happen and when it does all too often these investors get burnt.

While it is possible they are right and the market has bottomed, the All Ordinaries Index is far from convincing, which is why it is far better to err on the side of caution. Given this, I am still recommending that investors sit tight and get ready for the next opportunity to buy that will come in the not too distant future.

For now, good luck and good trading. 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.