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Gold stocks, already one of the brightest sectors of the Canadian stock market over the past year, are proving their mettle amid the spectre of a coronavirus pandemic.

The potential for the viral outbreak to compromise global growth, as well as the rising likelihood of central banks providing additional stimulus, have combined to drive both gold prices and gold stocks higher.

Since the health scare started creeping into financial markets in mid-January, the Canadian gold-mining space is up by 5 per cent, while the S&P/TSX Composite Index is down by 5 per cent. And gold producers account for six of the top 10 performers on the benchmark index over that time.

But it hasn’t been a smooth ascent for the yellow metal and its purveyors.

On Tuesday, when major U.S. stock indexes were down by 3 per cent, gold fell alongside equities, losing 1.5 per cent to close at US$1,635 an ounce.

And on Thursday, when the stock market sell-off resumed, Canadian gold producers got swept up in the downslide, ending the trading day that was shortened by a TSX technical snag down by 4 per cent.

“Markets are attempting to price something that's incredibly difficult to price,” said Christopher Louney, commodity strategist at RBC Capital Markets.

In any sort of crisis, including the political or military kind, gold tends to react swiftly with a price spike that often proves fleeting, Mr. Louney said. “The durability of that rally depends on the economic and financial fallout.”

A global health emergency, however, is particularly difficult to quantify.

The coronavirus has clearly raised the risks of a global recession considerably. Last week, the International Monetary Fund lowered China’s growth forecast to 5.6 per cent for this year, which would be the slowest pace since 1990. And on Thursday, Goldman Sachs cut its forecasted earnings growth for S&P 500 companies to zero.

Neither of those forecasts reflects a more dire scenario, where the spread of the virus accelerates and the financial impact multiplies.

If that happens, central banks will be quick to support the global economy, said Justin Stevens, an analyst with PI Financial. “If the Fed was willing to cut rates while the economy was still doing quite well, what do you think is going to happen if the economy starts to stumble?”

The U.S. Federal Reserve cut policy rates three times in the second half of last year, which coincided with gold prices rising by nearly 20 per cent.

That rally, however, didn’t exactly capture the imagination of the investing masses. The steady drumbeat of record stock-market highs, driven in the U.S. by the mammoth tech sector, consumed a great deal of investor attention, while dividend stocks satisfied the appetite for yield.

“I don't think precious metals make up any significant portion of most retail investors portfolios right now,” Mr. Stevens said.

Like the energy sector, Canadian mining has been reshaped by some lean years. Exploration budgets have shrunk, producers have merged and costs have been cut in an era of reduced gold prices, which sank as low as US$1,050 an ounce in 2015.

Many of those producers are capable of generating substantial free cash flow if gold manages to hold onto some of its recent gains. Spot prices were about US$1,640 as of Thursday’s market close.

Support for gold prices could come from falling interest rates, Ian de Verteuil, head of portfolio strategy for CIBC World Markets, said in a note. The traditional knock against gold is that it pays no yield. But in an era of negative real interest rates, neither do government bonds.

Rate cuts will effectively push more bonds into negative territory, adding to a global total that already sits at about US$14-trillion.

“Gold is especially well positioned if you think there’s going to be another wave of stimulus coming down the pipe from central banks,” Mr. Stevens said.

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