As I've watched what's happened to the entire gold sector over the past two weeks, it's become clear that a large number of hedge funds have been short financials and long gold, gold mining and other inflation hedges.

When the financials began to rally last week after changes in the SEC's rules, it caused massive deleveraging across the board by these funds, since they were forced to cover shorts in financials and sell mining shares, gold, oil and other inflation hedges.

Even as the covering in the financials came to a close yesterday, the cumulative selling in the miners then resulted in more and more margin calls. And I believe those margin calls also explained much of the "randomness" of the selling in gold miners on Thursday.

Some stocks were up for no particular reason, while others that had been trading better a few days earlier were suddenly slammed (like Gammon Gold (GRS) and Golden Star Resources (GSS)).

In any event, I do think the gold shares are now stabilizing, and once we finish up the clean-up type selling in the shares on the open this morning, I think we've got a good shot at bringing this August-like collapse to an end today. Obviously, I believe the yellow metal's pullback from $990 also likely came to an end this morning as well.

For those that maybe missed the August 2007 low, you may be getting a rare opportunity to buy a similar climactic low in the gold miners in the here and now. Everything's fundamentally positive for the miners at this point:

1) The Fed's powerless to do anything about inflation as employment and the banking system continue to deteriorate.

2) The positive seasonal period for gold begins in 5 trading days and investment demand has already pushed SPDR Gold Shares' (GLD) holdings to a new all-time high this month.

3) The gold/oil ratio continues to move in favor of the miners.


Click to enlarge

4) The gold shares as a group relative to gold haven't been this cheap in years, as we can see in the new multiyear lows in the XAU/Gold and GDX/GLD ratios that were hit yesterday.


Click to enlarge


Click to enlarge

If that isn't a case for buying the miners here, I don't know what is.