Guest Post: Mining Stocks Bounce Indicating a Bottom?

SD reader FW discusses today’s positive action in the mining sector, and shares our sentiments that the downside in gold and silver from here is minimal compared to the blast-off that will come with an official QE3 announcement later in 2012.

Mining Stocks Bounce Indicating a Bottom?

The mining stocks are catching a pretty strong bid right now.  They have been leading the bounce-back in today’s PM spot prices.  Silver bell-wheathers like Silver Wheaton are strong today, and mid-sized producers are getting a re-look as Endeavour Silver reported some nice Q1 results yesterday.  Heck, even the bloated HUI index is up.

Even though it sounds like a broken record, and even though we have drifted down still further from last week, the mining stocks have now joined the already positive signals coming from technical signals like the divergence of the advance-decline line, and the anecdotal indication of active bottom-fishing on reversal spikes we’ve seen in the last two weeks.

Markets frequently bottom with cascade washouts of capitulation.  But one of the artifacts of a massively manipulated market that is increasingly understood as such is the fact that if there’s enough capital looking for a home and safe harbor (i.e., BRIC+MidEast Central Banks, Asian money in general), that capital is willing to jump the gun and bottom-fish.  This is all the more probable when the counter-party risks to financial system exposure is rocketing higher.

As painful as the current correction is proving to be – especially for those holding PM sector equities over the last 2 months – today’s trading looks healthyI continue to see the downside in silver and gold from here as being tiny compared to the blast-off that will be upon us later this year.  More QE will be out in the open and the hoards of hedge fund zombies will be back, pushing the sector higher.  But after their arrival, I’m expecting the start of the next round of institutional buying and the start of the main part of “phase II” of the PM bull market, when the institutions start to enter the sector in mass.  To draw an analogy, it would be like 1995 for the tech boom of yesteryear, when the institutional money flows just began to ratchet higher.  This will all play out later this year.

Many in our camp have felt like up-chucking by now.  That’s normal.  But when fundamentals have only IMPROVED during this entire down move, it is indeed wise to be right and sit tight.  This pain is almost over.