Assuming a decline in the gold price to only $1,300 per ounce, gold stocks probably have another 25% downside, at least, before this cyclical bear market in gold runs its course. For example, Market Vectors Gold Miners ETF ( GDX) can probably ultimately be bought for less than $25, whereas Market Vectors Junior Gold Miners ETF ( GDXJ) can probably be bought in the $11 range within the next three months.

The reason is that many gold miners simply can't justify their current lofty market capitalizations on the basis of projected earnings and cash flow, even with gold prices at $1,300.

And a few gold miners that have been caught wrong-footed in the midst of expensive capital expenditure projects will be shut out from capital markets and will face insolvency and/or the need to make highly dilutive secondary offerings.

The distress of just two or three companies in the sector will typically set off panic selling in the whole group, as the majority of gold stock investors have no idea whether the stocks they own could become the next distress situation.

I doubt the secular bull market in gold is actually over. But a cyclical bear market in gold is upon us now, and it will not have run its full course until it has inflicted maximum pain on the speculative holders of "paper gold," effectively running the weakest hands out of the market, properly setting the stage for a possible final leg in the secular bull market in gold.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
James Kostohryz has accumulated more than 20 years of experience investing and trading virtually every asset class across the globe.

Kostohryz started his investment career as an analyst at one of the US's largest asset management firms covering sectors as diverse as emerging markets, banking, energy, construction, real estate, metals and mining. Later, Kostohryz became Chief Global Strategist and Head of International investments for a major investment bank. Kostohryz currently manages his own investment firm, specializing in proprietary trading and institutional portfolio management advisory.

Born in Mexico, Kostohryz grew up between south Texas and Colombia, has lived and worked in nine different countries, and has traveled extensively in more than 50 others. Kostohryz actively pursues various intellectual interests and is currently writing a book on the impact of culture on economic development. He is a former NCAA and world-class decathlete and has stayed active in a variety of sports.

Kostohryz graduated with honors from both Stanford University and Harvard Law School.

View Kostohryz's LinkedIn profile and connect with him here; follow him on Twitter here and Google+ here. When connecting, be sure to identify yourself as a reader from TheStreet.

If you liked this article you might like

Here's What Stocks You Want to Own in the Event of a War With North Korea

Gold, Google, SEC Hack - 5 Things You Must Know Before the Market Opens Thursday

Here's the Hottest New Way to Get Rich With Gold

How to Invest in Unstoppable Gold Prices

Novice Trade: Gold ETF