Dear Gold & Options reader,

There has been no better opportunity to buy small-cap gold miners since 2001-03 than during the last quarter. I know, all the gold bugs are telling you the same thing, and trouble is, they've been saying it for years. Readers are immune. My credibility is hurting too. No one is listening. Yet that does not change the fact that the right thing to do was to keep buying. The wrong thing to do was to capitulate.

Two wrongs wouldn't make a right.

Indeed, the institutions are falling hand over fist for stock.

Bullish fever in gold miners is spreading out to the other miners and equity sectors. The equity risk premium melted a little this week, as action in the Treasury market in the preceding weeks foretold.

Commodity prices are still struggling to bottom, but they look perkier toward the end of the week.

Meanwhile, gold prices continue to soar, despite two attempts by the bears to upset the bulls around the $900 level over the past two weeks. Investment demand is being driven by the bad news about the economy, especially in Europe, a collapsing pound and other weak currencies, the threat of new lows in the Dow as well as fresh signs of softening momentum in the dollar's foreign exchange rate.

We saw the first weekly decline of any significance in the U.S. banking system's excess reserves -- by about $50 billion. This means the banks are starting to step up their lending. The move caused a $50 billion decline in demand deposits supplanted by a $100 billion or so inflation in savings deposits.

Did you get that?

Some writers are suggesting the decline in M1 (demand deposits and currency) suggests deflation.

Besides, the market is telling us a different story.

Risk premiums are fading. Notice the yen weakening again.

I am seeing evidence so far, technically, that continues to support my hypothesis for a countertrend bounce in stocks and commodities, generally, in coming months. I would expect the dollar to weaken, bonds to fall in value and recovery sentiment to spread out a bit. The driving factors are technical in that the best reason for a stock and commodity rally is simply that they are oversold on the charts -- but they are also oversold fundamentally... factoring in an extreme deflationary outcome. So do not expect the trend to persist. While it does, however, investment demand for gold is likely to taper off.

The weakening dollar and general inflation outlook will continue to support it, so I'm not looking for a huge correction in gold prices or gold shares. The recovery trade is likely to underpin the latter too.

Already, I'm reading about falling input and labor costs for gold producers.

I continue to hold to my outlook for an ebbing in the gold ratios -- mainly, for technical reasons.

Don't be fooled by it when you see it. The gold shares are still the best place for your money this year, and our picks are going to top the charts.

Good trading,