The battered gold miners’ stocks are finally starting to recover after a rough few months. Their prices slid with gold in July, plummeted in a brutal forced capitulation in August, and then dropped again in an echo capitulation into mid-September. That left them at fundamentally-absurd price levels wildly disconnected from their actual profitability, leaving this sector with big mean-reversion upside ahead as it bounces back.

The leading gold-stock investment vehicle and increasingly benchmark is the GDX VanEck Vectors Gold Miners ETF. As of this week, it still had $8.5b of net assets even at today’s super-depressed gold-stock prices. That dwarfs everything else in the 1x-long major-gold-miners ETF space, running 40.5x bigger than its next largest competitor! So GDX is the dominant proxy for the fortunes of the gold miners’ stocks.

This small contrarian sector has had a tough 2018, with GDX down a serious 19.1% year-to-date as of the middle of this week. That’s mostly explainable by gold’s own 8.0% YTD swoon. Since their earnings are so dependent on prevailing gold prices, the major gold miners’ stocks tend to leverage gold’s trends by 2x to 3x. With their downside leverage running 2.4x so far this year, that’s right in line with precedent.

But this serious gold-stock weakness is a recent thing. Back in mid-June, gold and GDX were trading at $1302 and $22.66. Gold was dead flat in 2018 at that point, and GDX wasn’t much worse with a 2.5% loss. That was actually pretty resilient given the market backdrop. The US dollar was strengthening with its US Dollar Index up 2.8% YTD. The dollar’s fortunes heavily drive gold-futures speculators’ trading.

And gold investment remained decent then too despite the flagship S&P 500 stock index (SPX) climbing 4.1% YTD by mid-June. Gold investment demand wanes when stock markets are euphoric. Gold’s best investment proxy is the physical gold bullion holdings held in trust for shareholders of the leading GLD SPDR Gold Shares gold ETF. They were only down 1.0% YTD then, so investors weren’t materially selling.

Thus the gold-stock story today isn’t a 2018 one, but a past-few-months one. In July gold fell 2.3% on a big 2.3% draw in GLD’s holdings thanks to a strong 3.6% SPX rally. Why prudently diversify stock-heavy portfolios with counter-moving gold when stocks seem to do nothing but rally indefinitely? The weakness in gold that month forced GDX 4.6% lower, which made for 2.0x downside leverage which was on the light side.

But things really went pear-shaped in August.  A mounting emerging-markets currency crisis centered on the plummeting Turkish lira goosed the USDX on safe-haven buying. So gold plunged 4.1% during that month’s first half on a sharp 2.2% USDX surge. The gold stocks, which are ultimately leveraged plays on gold, took it on the chin. GDX plummeted 14.7% in that short span making for serious 3.6x downside leverage!

That naturally devastated the already-fragile psychology in gold-stock land, leaving its traders despondent and super-bearish. So the gold stocks couldn’t muster a recovery in August’s second half with gold. While it rebounded 2.2% into month-end, GDX could only stage a pathetic 2.1% rebound. Overall in August, gold fell 2.0% while the gold stocks per GDX plunged 12.8%.  That was the result of a forced capitulation.

With gold stocks so deeply out of favor, there aren’t many investors and speculators left in them who don’t want to be there. Only hardened contrarians remain, traders who aren’t spooked by mid-August’s gold low near $1174. But they still have to run stop losses, and lots of those were triggered as gold stocks fell exacerbating their plunge. That forced technical selling begot more selling, snowballing out of control.

I wrote a whole essay explaining gold stocks’ forced capitulation several weeks ago. That heavy-if-not-extreme gold-stock selling wasn’t voluntary or even sentiment-driven. But it stoked raging bearishness as GDX was pummeled to a deep 2.6-year low. It’s rare for major gold stocks to leverage gold’s downside by an extreme 6.4x, definitely not sustainable. But exceptional sentiment extremes still take time to dissipate.