Calendar year 2013 will be a year many gold bugs would rather forget. After a sustained multi-year rally, the gold price touched a 52-week high of US$1703/oz near the start of 2013. Since then it has been in a consistent downtrend with the precious metal currently trading just US$50 above its year low of US$1180/oz.
The decline has certainly unwound much of the exuberance that had been on display in the gold sector, with the US$1180/oz level reducing the metal back to where it traded in the aftermath of the Global Financial Crisis. While the decline in the gold price has been dramatic, the effect on gold producers and explorers has been nothing short of horrifying.
Due to the leverage gold producers have to higher gold prices, as well as the widely held view that the cost of production for many miners requires a gold price above US$1200, many gold exposed stocks including the $5.6 billion Newcrest Mining (ASX: NCM) have seen their share price plummet by 60% or more during 2013.
That’s the past but what about the future?
The difficulty which faces investors in the gold sector is accurately predicting the average gold price. Given the inherent difficulties in forecasting in general and forecasting the gold price specifically, investors looking for opportunities to buy beaten down gold producers are best off focusing on the best capitalised and lowest cost producers.
As the largest locally listed gold producer, Newcrest with its diversified asset base enjoys some obvious advantages over some of the smaller single-mine producers. Meanwhile Regis Resources (ASX: RRL) is also one of the more established producers with a market capitalisation of $1.4 billion and operations in both New South Wales and Western Australia. Beadell Resources (ASX: BDR) is also one of the larger miners with a market capitalisation of $611 million. The company commenced mining in Brazil after government regulatory approval was granted in August at its Duckhead project.
The collapse in the gold price and gold stocks during 2013 certainly begs the question was it over-done and will some of the falls be recouped in 2014? Gold investors will certainly need a tolerance for risk. Or a deep understanding of geology and mining to give them a better insight than most into where the gold price may head in 2014. Those investors may well choose to sift through the wreckage for some low-cost producers with good prospects.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.