Six Top Gold Picks

Gold prices had a terrific run in 2007 and they should stay strong in 2008, according to Merrill Lynch analyst Mike Jalonen. He is also predicting good things for gold equities, which faced brutal cost challenges last year.

Mr. Jalonen is calling for 2008 spot gold and silver prices to average $750/oz and $14/oz, respectively. He outlines a number of reasons for the strong outlook, including a weakening U.S. dollar, rising jewelry demand in developing countries, and future declines in supply. He also points out that even though mine production will increase in the next few years, it is expected to fall starting in 2011.

In a note to clients he wrote:

Even with higher gold prices, few new mines of significant magnitude are being built due to skyrocketing capital costs. The average cost of mining gold [including CAPEX] globally is rising and currently sits around $550/oz.

Those rising costs are a major problem for gold companies, but Mr. Jalonen still expects good things from the equities. He figures that high gold prices and byproduct credits should allow gold producers to make "healthy" profit margin improvements this year. According to his forecast, the production-weighted average net profit margin for the North American gold producers should rise from 18% in 2007 to 22.7% in 2008.

His top picks are Agnico-Eagle Mines Ltd. (AEM), Goldcorp Inc.(GG), IAMGOLD Corp. (IAG), Royal Gold Inc. (RGLD), Yamana Gold Inc. (AUY), and Pan American Silver Corp.(PAAS).

AEM vs. GG vs. IAG vs. RGLD vs. AUY vs. PAAS 1-yr chart: