Can you profit from a surge in gold stocks?

After falling so far in 2013, is now the time to make money on gold stocks?

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Two weeks into the new calendar year and gold stocks are showing signs that the price free fall seen in 2013 has been stemmed.

The market has shifted slightly and we appear to be at a point now where gold stocks have fallen so far that even small percentage increases in the price of gold results in big jumps in share prices. It is the exact opposite of the situation faced in the latter half of last year, where small decreases in the gold price saw substantial falls in the gold companies.

This is reassuring for gold investors and suggests the shock and panic from last year has worn off as the price of gold stabilises. Yesterday gold was selling for up to US$1,257 per ounce – close to the metal’s one-month high. For Aussie producers the price is boosted slightly higher due to the muted Aussie dollar, which contributes to operating margins of the producers.

In response, gold stocks have surged over the last month relative to their low share prices, but are still massively off their previous highs. Newcrest Mining Limited (ASX: NCM) shares are up almost 20% for the month, while Silver Lake Resources Limited. (ASX: SLR) is up 50% and Northern Star Resources Ltd (ASX: NST) is up 37%. By comparison the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) has risen just 3.8%.

There may be more to come from the surge, but the consensus outlook for gold in 2014 remains grim. There are several pretty strong arguments for this, including gold being abandoned by ‘smart money’ – hedge funds and other large institutional buyers; lack of inflation, and the tapering off of the Federal Reserve’s bond-buying program as the U.S economy strengthens, which will stifle demand.

Last week the Wall Street Journal’s Market Watch reported that Bank of America Merrill Lynch had slashed its average 2014 forecast by 11%, to US$1,150 an ounce, and warned it could go lower.

Foolish takeaway

There will likely be further surges in the share prices of gold producers in the coming weeks and months on small movements in the gold price, but the overwhelming indicators for 2014 point towards further price pressures and thus share price volatility. If you are going to take the gamble, be prepared for a bumpy ride.

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Motley Fool Contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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