In hindsight, the gold bugs were operating under the wrong investment thesis.

They assumed that aggressive stimulus policies by the Federal Reserve and other central banks would lead to ruinous inflation. Yet after more than $1 trillion in stimulus — in just the U.S. — price pressures have been non-existent. Europe is even treading perilously close to deflation these days.

Yet as 2013 turned out to be a miserable year for gold investors, the precious metal has made a sharp U-turn in 2014. Surging demand from China has pushed gold prices to four-month highs. Chinese consumers bought more than 1,000 tons of gold in 2013, according to the World Gold Council, as investors seek a safe haven at a time when real estate prices appear to be in a bubble.

#-ad_banner-#Yet investors shouldn’t be assuming that we’re now at the start of a fresh bull market in gold. The “gold as inflation hedge” strategy is officially dead, and although China and India remain active buyers of gold, many central banks are in the process of shedding their gold hoards.

Some investors may be getting carried away with renewed bullishness for gold. The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), for example, has risen roughly 50% since late December. Firming gold prices will help cash-starved junior miners, which are typically in the development phase and often need to tap fresh capital to complete their development plans. But gold prices still remain well below the peaks seen in recent years.

Still, gold prices that are no longer falling, and indeed, stabilizing in the $1,250 to $1,350 per ounce range, calls for a new investment strategy.

In September, with gold prices in freefall, I suggested shorting one of the industry’s least profitable miners, Newmont Mining (NYSE: NEM). I added that the company had an uncomfortably weak balance sheet that would create deep risk if gold prices really collapsed.

Newmont’s shares went on to tumble 30% by early February, though the rebound in gold prices has helped end the stock’s slide. Still, this is not a miner to own in any pricing environment.

Instead, it’s best to stick with low-cost producers, which are more capable of handling a fresh pullback in gold prices, or can generate outsized profits in a firming pricing environment. As Citigroup analyst Tobias Lefkowich wrote in a December note to clients, “low-cost companies with a better balance sheet that can continue to grow may outperform.”

Gold miner Goldcorp (NYSE: GG) fits the bill, with fully loaded production costs steadily falling to a projected $810 an ounce by 2015, according to Goldman Sachs. That’s below the industry average of $959.

There’s a growth angle here, too: The company is boosting output by more than 30% over the next few years, with much of that supply coming online as key mines at other firms start to see rising depletion rates. By 2017, Goldcorp is expected to be producing 3.07 million ounces of gold annually, up nearly 15% from 2.67 million ounces last year.

Assuming gold prices stay constant, Goldcorp’s earnings before interest, taxes, depreciation, and amortization (EBITDA) should surge close to 120% from $1.1 billion this year to $2.4 billion by 2016, according to Merrill Lynch. The balance sheet is equally impressive: Even if the company completes its proposed acquisition of Osisko Mining (OTC: OSKFF), net debt-to-EBITDA would still be around 1.75, below the industry average of 2.4.

Risks to Consider: Gold prices have been in a steady uptrend in recent weeks and may be due for a breather. As a result, look at Goldcorp more as a long-term investment than a short-term trade.

Action to Take –> If gold prices tumble to fresh lows later this year, then Goldcorp will maintain positive cash flow while higher-cost rivals start to hemorrhage cash. That kind of industry distress would only strengthen the company’s hand as it can boost production to make up for the lost production at rivals’ shuttered mines. If gold prices move yet higher, look for analysts to raise their cash flow forecasts for Goldcorp in the coming years. This miner is one of the true rain-or-shine business models in a boom-and-bust sector.

P.S. In a recent issue of his premium Scarcity & Real Wealth advisory, my colleague Dave Forest told subscribers about a gold miner that he thinks has fallen too far compared with the price of gold — especially considering that it’s one of the top low-cost producers in the sector. To get all the details, click here.