The Swiss rider qualified for the knock-out final stages of 16 in 15th place.
But after qualifying for the final head-to-head race, he made the most of a mistake by Sweden's Richard Richardsson to take gold.
Schoch had started the day up against second seed Alexander Maier, the brother of Austrian alpine ski legend Hermann Maier.
The 32-year-old stated his intentions with a confidence-building victory and made the most of the fact that a host of favourites fell by the wayside as the competition progressed.
"This is the most fun day of my life"
Richardsson, the 1999 world champion, outclassed Schoch in the first of the two-run final.
But his advantage of 0.24 seconds went in the second run when, after almost falling three times, he failed to finish.
After being handed his gold medal, Schoch said: "My strongest point was that I had really strong nerves out there."
To the delight of the home crowd, America's Chris Klug took third.
He beat reigning parallel slalom world champion Nicolas Huet of France in the run-off for bronze.
It marked a remarkable comeback for Klug who underwent lifesaving surgery for a liver condition 19 months ago.
In 1993 he was diagnosed with the rare disease primary sclerosing cholangitis, a disorder that slowly eats away at the bile ducts' ability to function.
His life was saved after he received a donor from a 13-year-old schoolboy who had died after being accidentally shot.
After surgery he was soon back on his board and determined to do well at the Olympics.
"This is the most fun day of my life," said Klug who beat Huet by a mere 0.15secs in the first run before clinching the bronze by a far healthier margin in the second.
"I got the bronze here in front of all my buddies, family, girlfriend and everyone from Madison with the big blue fingers. I was just so stoked to be here for all those guys.
"It's a miracle - I'm so lucky and for it to have turned out like this is pretty special."