Going for gold

As more and more central banks were selling off their gold reserves, especially the Europeans to meet their European Currency Union liquidity criteria, it seemed that gold was on a free-fall with no end in sight. But recently the price has stabilised and there's increasing speculation that a price recovery, albeit a slow one, is on the way.

WMC abandons hedging

Western Mining Corporation (WMC),

the second largest gold producer in Australia, recently announced that it had effectively sold off its gold price hedging for its post 2000 production. Hedging is basically an insurance policy - gold producers sell gold contracts to ensure they can sell their future production at a guaranteed price. It removes the uncertainty of price fluctuations.

WMC did this to take advantage of the current low gold price and secure a large profit. This is likely to mean that WMC believes inflation will again start to rise and that gold will return to its historical hedging role.

It also seems that industrial and commercial demand for gold is on the rise, which should help push the price up. This good news though seems a little way off

and there may be more pain before gold

once again take its place as the most precious of metals.

Stocks for the upturn

In preparation for a price upturn, what stocks should you consider? The answer is those larger gold companies that are low cost producers and/or have hedged their gold production well. By no means exhaustive, the table lists our preferred companies for investors to weather the gold downturn in preparation for the upswing.

Takeover targets

While the gold price remains low there's a chance that the lower cost Australian producers become takeover targets. Looking at the table, it would seem that Delta (with one of the lowest cash costs in the world) and Acacia would be the most likely targets. PNG-based Lihir Gold is also a low cost producer, only now starting production, and forecast for full production in a few years time.

If the gold price remains low for several years, it's these companies that will be popular - they can make a decent profit even in a sustained low gold price environment. Sons of Gwalia, although not a very low cost producer has nearly 8 years of its current production hedged and pays a high yield. This would keep any investor happy while waiting out a recovery in the gold price.

Normandy is the safest gold stock to invest in, mainly due to its size. Production is around 3 times more than the next largest producer at around 1,500 tonnes per annum, backed by an impressive hedge book and backed by an impressive hedge book and solid management track record.