Montreal, Canada

After dropping $101 per ounce since hitting an all-time high in early December, gold prices have managed to recover about half of January’s draw-down. Prices are just 3% below their best levels this morning.

Investor sentiment in the gold sector is the most negative it’s been in more than a few years and that’s just fine by me. The more negative the market is, the more bullish I become.

This morning, Barrick Gold (NYSE-ABX) announced Q4 earnings. The company continues to make a mint with production costs around $500 an ounce and gold trading just south of $1,400; that’s a good margin. ABX is spitting-out tons of free-cash and has one of the best properties and production pipelines in the business.

Yet despite the positive earnings for most gold companies and a wave of dividend introductions and increases since last year, the bears continue to talk-down this rally.

Most individuals and institutions that missed the gold bull market remain stubborn about its legitimacy and simply fail to understand the relationship between fiat currencies, the destruction of credit and rapidly rising inflation coming our way as a result of Bernanke’s balance sheet explosion. The Fed will overshoot credit creation. There’s no doubting this.

In my book, it’s pointless to trade gold. It’s a secular bull market, so relax. Hedge funds think differently, of course.

Starting in late October, hedge funds and other fast-money traders started dumping their gold positions. In hindsight, that was a good move because gold thereafter ran higher for another month and then peaked. But hedge funds don’t know the gold market any better than most of us and I suspect these timers are back in the market in February as prices recover.

Finally, the gold bears point to the yellow metal having no real economic feasibility, unlike copper, nickel, lead, tin and other industrial metals. That’s true to a point. Gold is not widely used for industrial purposes. But gold prices are rising, in part, for the same compelling demographics that have propelled the base metals higher since the early 2000s; China.

China is the largest consumer of industrial metals. And it’s quickly becoming the world’s largest source of retail gold demand, possibly surpassing India in 2011 as the Chinese liberated the gold market last year for the first time through the creation of ETFs.

The failure to understand the supply and demand factors favoring gold will result in lost opportunity for the gold bears. And that’s fine with me. I hope they stay bearish.