Is it time to buy gold stocks?

Gold may be on the way back up

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 14, 2013 10:37 am AEST

Gold stocks have been hammered over the past year, with many posting falls of 50% or more, but now could be the time to have a closer look.

The gold price appears to be staging a recovery, since hitting a low of US$1,211 an ounce in July. It's currently trading at US$1,322 an ounce, and according to the World Gold Council (WGC), the exodus out of gold may be nearing its end.

"We feel that speculative money has largely come out of the gold market. We feel that gold is nearer the bottom than the top right now. You'll see a stronger market towards the end of the year, and into next year," Marcus Grubb, managing director of investment at the WGC told CNBC.

Yes, I know the line about asking the barber if I need a haircut, but the WGC expects prices to pick up towards the end of 2013, with huge physical demand coming from China and India. Supply has also softened, with many mines around the world unprofitable at gold prices around US$1,100 to US$1,200 an ounce. Several mines have already been put on care and maintenance until the gold price improves, or until companies can find ways to cut their production costs.

And it's not just the tiddler miners that are closing down operations – the world's largest gold miner, Canada's Barrick Gold said it was planning to close or sell its costlier mines.

While many investors will be drawn to Australia's largest gold miner, Newcrest Mining (ASX:NCM) for its supposed 'safety', investors should really be looking for miners with very low cost operations, ideally with more than one mine to diversify risk (Newcrest is likely to be forced to close at least one of its mines due to high operating costs).

Kingsgate Consolidated (ASX:KCN) operates one of the lowest cost gold mines in the world in its Chatree operation in Thailand, has many of years of production ahead of it, and is currently trading at the same price as its property, plant and equipment value. Investors are effectively getting the gold produced for free.

Beadell Resources (ASX:BDR) owns and operates the third largest Brazilian gold mine, Tucano, at a current cash cost of US435 to US485 an ounce, which is expected to fall even further from iron ore by product sales. Northern Star Resources (ASX:NST) has recorded some of the highest drilling results ever in Australia, and is cashed up with no debt, while Silver Lake Resources (ASX:SLR) has two major operations with ore sourced from several open pit and underground mines.

Foolish takeaway

With the gold price stabilising and potentially on the way up, now may be the ideal time to have a closer look at the gold miners.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake and Kingsgate.

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