excerpt from Adam Hamilton:

Since their latest highs, the HUI and GDX plunged by 40.8% and 41.0% as of this week. This is ridiculous given gold was only down 18.8% from its own all-time high a little earlier. But the selling in the major gold miners was dwarfed by the apocalyptic plunge in the juniors. From its latest interim high last April, GDXJ was down a stomach-churning 57.8% as of this week! Juniors are getting obliterated!

These highly-speculative stocks are tasked with the critical mission of discovering and starting to mine new gold deposits to feed the world's voracious investment demand for this yellow metal. And just like larger miners, the price of gold determines the profitability of these hard labors. And universally in the stock markets, any company's long-term profits ultimately drive its long-term stock-price levels.

When GDXJ peaked in early April 2011, gold had just hit $1475 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 $1500 instead of $1800. 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 $1573 on close. So far this year, despite all the bearish gold hysteria, gold has averaged $1672! 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.