Hedge funds on aggregate pared their stakes in Goldcorp, the second-largest producer by market value, by 7.3 million shares in the first quarter, according to data compiled by Bloomberg. They cut holdings in Barrick, the world's largest producer, by 4.02 million shares and sold an aggregate 972,980 shares in Newmont Mining Corp, the biggest U.S. gold miner.

Bullion company shares have declined to a record low compared with the rest of the market as gold erased its gains for the year and concern increased about rising costs and project delays. The 16-company NYSE Arca Gold BUGS Index fell 5.2 percent in the first quarter and 5.2 percent in the previous period. Companies in the index are trading at 11.8 times reported profits, compared with 13.4 in the Standard & Poor's 500 index.

Paulson & Co., which manages about $24 billion, sold 1.1 million of its American depositary receipts of AngloGold Ashanti Ltd., its third-largest position, the New York-based company said yesterday in a filing with the U.S. Securities and Exchange Commission. Paulson also cut its holdings of ADRs in Gold Fields Ltd., according to the filing.

Eoin Treacy's view Cost increases, delays, permitting problems, government interference and labour disruptions are issues that assail just about all mining companies at one time or another. The commonality of the decline among gold miners over the last couple of months suggests that these reasons alone are not to blame for the antipathy directed at the sector.

A lack of free cash flow has long been an issue for gold miners as they seem to perpetually reinvest in increasing capacity rather than concentrating on accumulating cash and increasing dividends. However this alone is not enough to explain the depth and speed of the decline.

The tightening of credit conditions as a result of the Eurozone credit crisis is another potential rationalisation of the price action. In many respects the most important point is not the reason for the decline but rather what it means in terms of supply and demand.

The NYSE ARCA Gold Bugs Index of unhedged gold shares completed a Type-3 top formation in mid-March. This unleashed a self-feeding sequence of declines across the sector which has resulted in a deeply oversold condition. Regardless of whether one subscribes to a medium-term bullish or bearish script, the potential for at least a relief rally has increased substantially.

Additionally, gold found support yesterday in the region of the September and December lows and bounced emphatically today. A countermanding downward dynamic would now be required to begin to question potential for a further rebound. A more positive tone in gold prices, provided it is sustained, should act as a bullish catalyst for the deeply oversold gold mining sector.

I performed a Chart Library Performance Filter of my Favourites; grouping the constituents of the Gold Bugs Index, the top-10 holdings of the Market Vectors Junior Gold Miners ETF and another section with approximately 20 other gold miners. The list of 55 shares highlights both the best and worst performers in the sector.

For example, comparatively small cap shares such as Jaguar Mining and Gabriel Resources have each lost more than 50% of their value in the last month as of yesterday's close. Claude Resources and Osisko Resources were down more than 30%. Potential for at least a relief rally has increased substantially.

At the other end of the scale, Royal Gold posted a large upside weekly key reversal last week and is following through to the upside this week. A sustained move below $57 would be required to check potential for additional upside.

Agnico Eagle experienced the majority of its decline late last year and has lost downward momentum over the last couple of months. It continues to range above $30 and a sustained move below that level would be required to question potential for some additional upside.

Alamos Gold is one of the few gold mining shares to have remained within its more than yearlong range. It rallied powerfully today from the $16 area and a sustained move below that area would be required to question potential for additional upside.

Franco-Nevada Corp might not be a pure play on gold mining but yields 1.5% and has one of the more consistent patterns in a sector noted for its volatility. A sustained move below yesterday's low near $38 would be required to question potential for addition upside.