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Is now the time to buy gold stocks?

Some of the most unloved companies on the share market at the moment are the gold miners and explorers, which were dumped by an avalanche of selling over May and June as the price of gold flopped.

Many of the companies were then subject to a blast of write-downs from analysts after lowering production guidance and announcing asset write-downs, causing further despair and more selling from investors. Many companies, big and small, sustained significant drops in share price as panicked investors headed for the hills and short-sellers piled in.

After dipping to as low as US$1214 per ounce, the price of gold has recovered somewhat to around US$1310. This is still 18% down on the US$1600 gold was trading at a year ago, but many gold companies have been knocked down significantly more than this.

Newcrest Mining (ASX: NCM) shares are down 48% on one year ago. Regis Resources (ASX: RRL) is down 23%, while Silver Lake Resources (ASX: SLR) and Kingsgate Consolidated (ASX: KCN) are down 75% and 61%, respectively.

The fall in gold price has seen some notable retrenchments in company growth plans. Silver Lake Resources, which has reserves of around 6.4 million ounces of gold, has deferred underground development at its Murchison mine after a review of its 2014 budget.

However, going forward the weaknesses exposed by the events of the last two months will be patched up by management in order to survive and cost-cutting, which has been swift and aggressive, will help to protect margins in the coming quarters.

Current prices of many gold companies are at their lowest level in years, but their huge operations will continue to churn out the gold. For investors with an appetite for risk, now could be an opportunity to buy.

The one outstanding factor is really the price of gold itself. This can’t be easily predicted, though many try, and will remain a significant risk. Over the long term the most successful gold companies are likely to be those which can operate at the lowest cost which will help to protect them from further fluctuations in gold price.

Foolish takeaway

While some gold companies were undeniably caught swimming naked when the tide of gold prices went out, the onslaught of selling that followed was driven by fear. Now the panic has subsided, strong, well-managed gold companies could be an opportunity in the waiting.

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Motley Fool contributor Regan Pearson does not own shares in any companies mentioned in this article.

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