Cash From Chaos as Gold Shines

As with most commodities, gold is priced in dollars. So, gold prices rise when the greenback is falling, as has been the major trend for the past three years. And with interest rates expected to stay low for much of this year, many analysts say the dollar should continue to slide. (Still, recent strength in the dollar, especially vs. the euro, is one reason near-term caution on gold is warranted.)

Stanley expects gold to move "markedly higher" over the next six to 24 months, and because gold stocks typically lead the price of bullion, this is clearly a positive trend for the sector.

While the group isn't trading at bargain prices right now, analysts say many stocks still look reasonable. Merrill's Jalonen said North American producers trade at an average price-to-net-asset-value multiple of 2.2, which is close to the historical median of 2. "We believe gold equities have further upside potential," he said.

Patrick Chidley, an analyst at Barnard Jacobs Mellet, believes the stocks could rise 20% to 40% over the next year, as gold prices continue to move higher. "Hardly any of the stocks are cheap but the outlook is for improving earnings," he said.

Chidley said his favorite stock right now is Placer DomePDG, which he feels is attractively valued.

Skarica, meanwhile, prefers riskier names like EldoradoEGO, Cambior CBJ, Richmont Mines RIC and Golden Star ResourcesGSS.

"The reason I like them is they all have current production, so they have a source of revenues and will trade with the gold price. But they also have exploration upside," he said.

Eldorado, which Skarica owns, has only one producing asset -- the Santa Bento mine in Brazil, which produced 95,049 ounces of gold last year. If anything were to happen to the mine and production were to be shut down, the stock would no doubt be crushed. But Skarica likes the firm because it plans to develop a mine in Turkey with proven reserves of 5.3 million ounces. "Stocks like Eldorado are pricing in future production," he said.