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What are we looking for?

Gold companies that are in a good position to withstand any further declines in the metal's price.

How we did it

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Shares of gold companies have been hit by the recent turbulence in precious metal prices, making many of them look like attractive bargains.

However, the risks are considerable. With the global average production cost now running close to $1,200 (U.S.) an ounce, according to Nomura Holdings, some miners would face financial distress if the metal's price were to decline from current levels around $1,465.

Short sellers, who bet that share prices will decline, know this math as well as anyone. One indicator of which companies are most vulnerable is the degree to which short sellers are targeting a company's shares, hoping to profit from further declines.

The accompanying table lists the gold miners with market capitalizations in excess of $500-million (U.S.) that have the smallest short positions against them as a percentage of their overall float, or number of shares available for trading. A relatively small percentage indicates short sellers don't see any obvious weakness ahead for these miners' share prices.

Of course, a smaller short position isn't a foolproof indicator of quality – the bigger a company is, the more difficult it becomes to amass a large short position, so all things being equal, larger firms should do better than smaller ones on this scale.

Still, it is an important clue as to which companies are seen by short sellers as robust enough to withstand a downturn in the sector.

Investors should look at other factors, too. It's good if a company has large reserves and is trading at a low price-to-earnings ratio.

It's also good if a firm's short interest ratio (the number of shorted shares divided by the average daily trading volume) is modest.

What we found

The table lists the gold miners that would seem to be in the best positions to withstand a downturn. Investors should realize, however, that a fall in the price of gold would not be good news for any of the firms listed here. Before investing, you should do your own research and consider just how sure you are that gold's glitter is still bright.

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