Junior gold stocks are a contingent of the greater junior resources circuit that has simply been obliterated in the recent stock panic. Even though gold has been strong over this stretch, the risk capital that usually finds its way into these gold explorers had all but left the scene.

Measured by the S&P/TSX Venture Composite Index ((CDNX)), the juniors saw the worst of the damage in all the equity markets. From its 2007 high, the CDNX fell by 80% before it finally hit bottom in December. And at sub-700, the CDNX’s gains for the entire secular bull had been wiped clean, and then some. Check out my Juniors in Hell essay from November for more details on this junior genocide.

With gold getting a lot of attention in these wild markets, naturally its producers are also attracting interest. And almost silently, gold stocks have emerged from the depths of the 2008 stock panic to be the best-performing sector in the markets. From the November lows to last week, measured by the [[HUI]], gold stocks have soared 71% while the S&P 500 has merely ground sideways.

Gold is obviously the guiding light for gold stocks and its fundamentals remain exceptionally bullish. And with more and more interest in gold, a greater amount of speculative capital is naturally going to gravitate toward those vehicles with the ability to leverage gold’s fortunes.

Looking back over the last year, a lot has happened in the gold stock arena. In fact, in just over a year the environment in which we trade these stocks has radically changed. While some of the environmental forces have occurred from the inside out, the most impactful are external in nature and have really caught investors off guard.

Investors started their head scratching early on in 2008 when gold stocks performed quite sluggishly in response to a strong gold upleg. Gold soared 54% from its August 2007 low of $651 to its March 2008 all-time nominal high of $1005. Yet measured by the HUI, gold stocks were only able to eke out a gain of 69% over this same period of time.

Junior resources stocks reside in a realm that has long been considered the Wild West of the equity markets. And investors who speculate on the junior circuit are the consummate gamblers. Risks and rewards are realized in extreme fashion as juniors can either make you rich or rob you blind.

The allure of juniors will always captivate investors. It’s exciting to own a portion of a company that is in effect a modern day treasure hunter. Whether it is searching for precious metals or petroleum, if a junior scores a find, the owners of the company will be greatly rewarded. Speculating in juniors allows desk jockeys to become prospectors.

The face of today’s mainstream financial media has gone from meaningful analysis and commentary to constant tub-thumping between undisciplined Main Streeters, overambitious Wall Streeters, and ignorant bureaucrats. It has turned into a showcase of the blame game, everyone looking for a scapegoat to shoulder the iniquities of the masses.

Though the recent financial-market shenanigans are of historic proportions and have scared stiff nearly every investor on the planet, folks seem to be growing complacent. And it has been easy to fall into this trap and lose sight of investment strategy considering the indiscriminate selloff of virtually every asset class. Everything has been hit so hard that even the anti-commodity CNBC commentators have toned down their bubble-bursting rhetoric.

In December 1998, the Select Sector SPDRs were born.  This proved to be a groundbreaking and historic event that has forever altered the way people invest in the stock markets.  These nine exchange-traded funds (ETFs) are a core group of ETFs that allow investors to customize their portfolios with focus on individual sectors that collectively make up the S&P 500.

And it is this group of ETFs that ultimately made this type of investment vehicle so wildly popular.  XLY, XLP, XLE, XLF, XLV, XLI, XLB, XLK, and XLU now have combined assets in excess of $26b!  Among this core group of ETFs were the very first commodities-based ETFs, and this built the foundation for a commodities ETF revolution.

With seven consecutive years of rising gold prices, the gold mining industry has had ample reason to boost output.  The demand for gold has grown and will continue to grow and legendary profits can be won for shareholders.  But in provocative fashion not only have the gold miners been unsuccessful in growing supply, but global mined gold production is down since the beginning of the bull.

In last week’s essay I revisited gold’s strategic fundamentals with particular focus on economics, drilling down on global gold production and reserves trends.  And interestingly global gold production is down 4% since 2001.  In a secular bull market, this is not a logical supplier response to an economic imbalance.

As the precious metals summer doldrums come to a close, we need to assess the damage from another season of gold hatred and disdain.  Like déjà vu for veteran gold investors, the mainstream financial media took advantage of gold’s seasonal weakness to proclaim the death of the Ancient Metal of Kings. 

From a technical perspective gold’s summer activity indeed gave the naysayers fodder to jump on the “End of the Gold Bull!” and “Gold’s Bubble has Burst!” bandwagons.  Gold’s $190 plunge from mid-July to mid-August saw it knife through a number of key support levels.  This caused blood to flow in the streets even for the gold faithful.