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I'm Still Right

The emails started as soon as the Venture exchange dropped below 747 points on Friday.

"Hate to say I told you so, but…!"

"Three weeks – was that the rally you kept talking about?"

"Sorry to see your first big call turn sour so soon…"

You see, I had called Nov. 5th as the bottom for the mining sector. On that day gold, the Venture, the Euro, the gold miners' index, the junior gold miners ETF, and silver all hit multi-year lows. Some fell to those lows with a ferocity not seen since the financial crisis.

And it happened in the context of a sector ready for a rebound. Mining is cyclical because metals are necessities of life. Demand tracks population and growth upwards. Investment follows. In time, production rises above requirement and then everything has to calm down again. Speculation amplifies each movement.

It's the nature of the sector, but the sector has been in a downward trend for four years. That's the kind of correction that kills exploration, strangles development, and squeezes production to the point where there is not enough gold or zinc or silver to meet demand.

At the moment, that is especially true for gold. Central banks are clamouring for the stuff. Chinese and Indian buyers are all over it. Supply is limited and the pipeline of new production is half empty.

I saw all of this and I called it: We hit bottom on Nov. 5th. I see now that I should have been more specific.

What I meant was that Nov. 5th was the bottom for gold, and thus for gold equities. Gold is the sector's flag-bearer, the first violinist. When it goes, the mining sector follows.

A rising gold price draws investors to the yellow metal, making money available for exploration and development. Successes on those fronts – discoveries or acquisitions or project financings – increase the positive momentum.

Once investors engage with gold they become more open to investing in other metals. That adds oomph to silver, platinum, and palladium first – the other precious metals – and then to copper, zinc, lead, uranium, and the rest.

Slowly but surely the market remembers the attraction of investing in the very real world of resources, where supply and demand is a true driver, where the assets are tangible and the products essential.

That's one side of it. The other side is that gold rises when the market loses faith in T-bills and bonds and currencies as a way to grow value. Gold is not just a 'safe haven' investment – it is a pragmatic alternative to financial instruments that hold no intrinsic value.

Today is a prime example. Gold fell on Friday, losing $12 to US$1,182.75 per oz. When markets opened on Monday, traders in Asia and Australia hammered it back another almost $40. It was a huge setback for the yellow metal.

Then gold's safety net jumped into action.

First off, there are gold bugs around the world ready to buy when prices plummet like that. As soon as the selling momentum subsides slightly, they purchase.

That provides some safety. But gold found even more fundamental support today.

In the space of a few hours three pieces of news reminded the world why gold is good: Moody's downgraded Japan's credit rating, news hit that US retail sales over the holiday weekend cratered 11% year-over-year, and the Euro zone's manufacturing purchasing managers index (PMI) came in at 50.1 – barely above contraction and its lowest level in more than a year, with all-important Germany showing an actual contraction of 49.5.

Persistent economic weakness in many 'developed' parts of the world combined with massive sovereign debt loads, actual economic growth in gold-loving places like India, and limited supply after years of curtailments – that is what I call gold's safety net.

Whenever some specific event or argument starts pushing gold down, the safety net stops its fall.

Gold's double-edged appeal – as a demand-driven commodity and as an intrinsic store of wealth – has kept its value aloft better than its price in US dollars suggests. In dollars gold is little changed over the year. In euros, however, it is up 10%. In yen, gold has gained 13% this year.

And just to be clear: I am still right.

Gold has not fallen below its Nov. 5th level of US$1,142 per oz. since then. As of close today, it is in fact up 6.1%.

The Gold BUGS index (NYSE: HUI) of major gold miners is still up roughly 19% compared to Nov. 5th. The Junior Gold Miners ETF (NYSE: GDXJ) is up 22.5%.

Not everything is up. Copper is down, as is iron ore. Zinc is almost unchanged. But in calling the bottom I did not mean to suggest that, starting November 6th, every part of the mining sector would start a beautiful and synchronous ascent.

That is never how it goes. In their early stages bull markets are spasmic, advancing and retreating in uncertain fits and starts. Overall, however, they advance, gaining confidence over time.

I too am gaining confidence over time. I'm no going to lie – I woke up and ran to my computer this morning, holding my breath until the gold price chart refreshed. As soon as it did and I saw that gold's safety net had held up nicely, I smiled.

Then I checked a raft of share prices to finalize my next list of bottom fishing picks. Because there is no better time to buy than at the bottom and that, my friends, is where we are.

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