When GDXJ peaked in early April 2011, gold had just hit $1,475 for the first time in history. And given this ETF’s ascent into that interim high mirroring but only modestly outperforming the HUI, that valuation of gold-stock prices relative to gold was certainly conservative. But fast-forward to this week, and this basket of elite gold juniors was 58% lower while gold itself actually rose 4% over this same span!

Why is the entire gold industry valued between 40% to 60% less when gold is gradually inching higher even at its recent lows? You have to agree this makes no sense at all fundamentally, it is incredibly illogical and irrational. We continue to do extensive research into gold juniors at Zeal, and they continue to find excellent new deposits and bring great new mines online just like they always have.

In fact besides the lack of investor interest (which makes it very difficult to raise the capital needed to explore and mine), juniors as a whole have no new industry-wide operational problems or impairments. The entire junior-gold rout culminating in this latest capitulation is purely emotional, it has absolutely nothing to do with fundamentals. Gold-stock investors and speculators are simply scared, end of story.

The same is true in the major gold miners, where we’ve done extensive research on their profit margins. In both gross-margin and absolute terms, gold-mining profits continue to rise dramatically thanks to these sustained high gold prices. Late last August heading into the HUI’s all-time high, its components had a market-capitalization weighted-average price-to-earnings ratio of 23.3x earnings. By the end of April, it had plunged to just 13.2x.

So it’s not like gold miners aren’t earning money anymore with gold near $1,500 instead of $1,800. They are actually earning profits hand over fist, and are seriously cheap even by general-stock-market standards. 2011 was gold miners’ most profitable year ever by far, when gold averaged $1,573 on close. So far this year, despite all the bearish gold hysteria, gold has averaged $1,672. This is 6% higher.

Regardless of which angle you choose to view gold stocks from, their steep selloff culminating in this week’s capitulation climax makes zero sense fundamentally. The hard truth is gold stocks have been sold wildly disproportionately to gold’s own weakness merely because investors and speculators succumbed to their own unjustified fears. Capitulations are always irrational, emotional events.

The extreme fear and disgust generated by these exceptional selling climaxes force out every last trader that lacks emotional discipline. Sadly all many investors and speculators can think about is the last couple weeks’ technical action. They can’t be bothered with researching gold-stock fundamentals, or with learning the essential contrarian discipline of keeping their own emotions in check. So they surrender.

The capitulation event itself forces all the weak hands to exit at once, they sell low in their rush to realize huge losses. But once they are gone, the buyers regain control. And with everyone too scared shaken out, sentiment quickly swings back away from extreme fear and disgust. So capitulations nearly always spawn huge rallies and uplegs, major advances are born out of the deck-clearing throes of despair.

And indeed one appears to be starting. As I pen the draft of this essay on Thursday, gold and the gold stocks are surging dramatically out of Tuesday’s and Wednesday’s hyper-oversold lows. Even weak general stock markets weren’t enough to retard early-day gold and HUI rallies on the order of 2.5% and 6.0%! The sharp bounce after a brutal cascading selloff offers confirmation the capitulation is over.

At Zeal we’ve been actively trading gold stocks for over a decade, earning a fortune through every kind of extreme sentiment condition you can imagine. This week’s capitulation certainly isn’t the first time gold stocks have been loathed. Like every other sector, they gradually oscillate from in favor to out of favor and back again. If you can steel yourself to fight the crowd, be brave when others are afraid, you can buy them at incredible bargains occasionally. And today looks like just such a rare opportunity.

Since the vast majority of selloffs don’t climax in full-blown capitulations, such events are inherently unpredictable. So we did plenty of buying earlier in this gold-stock selloff. But all our positions are deeply-researched elite high-potential gold stocks with outstanding fundamentals. You can learn about them in our popular fundamental reports. Our latest on gold juniors are full of awesome companies trading at irresistible bargains. Buy your reports today, learn about these elite juniors, and buy cheap.

We also publish acclaimed weekly and monthly subscription newsletters loved by speculators and investors all over the world. In them I draw on our vast experience, knowledge, wisdom, and ongoing research to explain what the markets are doing, why, where they are likely heading, and how to trade them with specific stock trades as opportunities arise. Today we have plenty of great gold stocks on our books, which you can enter at much cheaper prices than we did. Subscribe today.

The bottom line is gold stocks appear to have just suffered a full-blown capitulation. For no fundamental reason whatsoever, they cascaded sharply lower from major lows. Traders simply let their own fear and anxiety overpower their reason, so all the weak hands rushed for the exits to end the pain. While miserable to suffer through, these rare extreme selling climaxes mark major long-term bottoms.

So if you can keep long-term fundamentals in focus and tame your fear, capitulations are the worst-possible time to sell and an amazing time to buy. Though they feel like hopeless death spirals, this very despair quickly burns itself out. And with buyers greatly outnumbering sellers, prices soon rocket higher to undo the tremendous technical damage of the capitulation. Gold stocks are due to rebound sharply.

Adam Hamilton, CPA   May 18, 2012    www.zealllc.com/subscribe.htm