Gold stocks have been on fire this year, blasting higher to 2014's pole position of best-performing sector. And this powerful rally's internals are looking as good as its headline gains. The recent months' gold-stock buying has been on big volume, with large capital inflows. This is very bullish behavior revealing a sea change in sentiment and strong conviction among returning gold-stock investors and speculators.

Naturally price action is the most important technical indicator, exposing underlying supply-and-demand trends for anything. The shares of precious-metals miners and explorers have surged this year because investor demand exceeds supply. The capital flowing into this beaten-down sector is overwhelming the number of shares sellers are willing to part with, bidding up stock prices and driving their sharp rally.

But the strength of rallies isn't fully apparent through just their price moves. Trading volume, how many shares change hands daily, is a critical secondary indicator. The strongest rallies advance on big high-volume buying, showing widespread investor interest and broad capital inflows. The more volume that drives any rally, the greater its momentum, staying power, and ultimate gains. Volume reflects vigor.

One of the many problems plaguing this past year's Fed-driven general-stock-market levitation was the low-volume buying that drove it. Low volume shows low conviction, traders begrudgingly buying shares in moderation since they doubt a rally's durability. Low-volume rallies are often more the result of a lack of sellers than any meaningful buying. Thankfully this certainly isn't the case for gold stocks in 2014.

Stock capital has been flooding back into gold stocks and silver stocks at large to unprecedented rates, resulting in some of the highest trading volumes seen in their entire secular bull! As a long-time student of the markets, I'm just amazed. You couldn't ask for a better high-volume rally to reflect the universal shift in sentiment now underway. Traders are flocking back to 2013's most-hated sector, hunting big gains.

For better or for worse, the stock markets are becoming increasingly dominated by exchange-traded funds. Many investors and speculators love the convenience of ETFs, preferring to let professionals do the individual-stock research and picking for them. The ETFs' diversified holdings greatly reduce the company-level risk, but at the expense of the far-larger gains won by buying the best individual stocks.

The flagship gold-stock ETF is Van Eck Global's Market Vectors Gold Miners ETF, better known by its symbol GDX. GDX currently holds 36 gold and silver miners, including all the elite majors and many of the bigger mid-range producers. It is well-constructed and a great proxy for the precious-metals sector. With more and more traders choosing GDX over individual miners, its volume also reflects this sector's.

Unfortunately comparing raw trading volumes over long periods of time tends to be misleading. Back in late 2011 around their record highs, gold-stock share prices were high. And wallowing in epic despair near the end of last year, gold-stock share prices were very low. So the same daily trading volume in December 2013 reflected far less actual investor interest and buying than it would have in September 2011.

The solution to making trading volume comparable over wide share-price ranges is a simple construct called capital volume. It multiplies each day's trading volume by its closing share price, showing how much money actually changed hands that day. These capital flows are comparable over time regardless of big swings in share prices. GDX's capital volume this year reveals surging investor interest in gold stocks.

GDX's raw daily capital volume is rendered here in red. Trading volume is extremely volatile, especially in gold-stock land. It's not uncommon for precious-metals stocks to see massive volume spikes running at 10x to 20x their 3-month averages on big news days! This makes analyzing raw volume difficult, as the signal-to-noise ratio is usually low. Moving averages can distill this great volatility into usefulness.

The yellow line above is the 21-day moving average of GDX capital volume. Why 21 days? That's the average number of trading days per month, so it's effectively a 1-month average. That smoothes out the wild extremes in trading volume, yielding a dataset much easier to interpret. And it reveals the incredible internal strength behind this year's sharp gold-stock rally, with some of the highest volumes of this bull.

Before we dig in further, realize that trading volume is a direct function of prevailing sentiment. Traders buy and sell most aggressively when they are the most emotional. Greed and fear are the two extremes, with sentiment swinging back and forth between them like a great pendulum. But these emotions are certainly not symmetrical. Greed builds gradually over a long period of time, while fear flares rapidly.

So selloffs, particularly the material and sharp ones, always witness higher volume. When stock prices are falling, traders desperately stampede for the exits in a frantic frenzy. Thus volume spikes in selloffs are a given, always expected. But rallies are an entirely different story. Since greed grows slowly, the resulting buying is spread out over a longer time span. Thus rallies tend to be lower-volume events.

So high-volume ones really stand out. For most of the last several years, the 21dma of GDX's daily capital volume meandered sideways in a consolidation trading range. This ran from roughly $450m on the lower support side to $900m on the upper resistance end. This is very small for an entire sector, but remember that most individual gold-stock trading still happens outside of this one GDX gold-stock ETF.

Gold stocks peaked at all-time highs in early September 2011, when GDX's price briefly exceeded $65. Leading up to that top, the highest the 21dma of GDX's capital volume climbed was $990m. You can see the spike above $1b in this chart, but that was driven by the subsequent sharp selloff. So the high-water mark for high-volume buying in gold stocks' entire secular bull is essentially $1b in GDX 21dma terms.

Just this week, this same gold-stock volume proxy surged to $960m! This is truly mind-boggling when you think about it. Back near their all-time highs a few years ago, prevailing gold-stock sentiment was quite bullish. While mainstream investors didn't care about this obscure sector, contrarians generally loved it. In the post-2008-stock-panic period at least, gold-stock sentiment has never been more favorable.

Fast forward to the end of last year. Gold stocks were all but obliterated in one of their worst years ever, crushed by a wildly-anomalous down year in gold. Thanks to the Fed-driven stock-market levitation igniting epic differential selling pressure in the flagship GLD gold ETF, gold and silver both plummeted to their worst annual losses in 32 years. Gold's 22.8% free-fall in 2013's Q2 was its worst quarter in 93 years!

The cratering precious metals led to wildly-overdone gold-stock selling. Last year alone, GDX's price plummeted a gut-wrenching 54.5%. Gold stocks have never been more hated than they were late last year. As I was pounding the table about at the time in mid-December, gold stocks were trading at fundamentally-absurd lows relative to the gold price that drives their profits and hence ultimately stock prices.

The flagship gold-stock index is the HUI, and late last year it had fallen to levels first seen over a decade earlier in August 2003 when gold was merely trading around $365! With gold nearly 3.3x higher near $1200, it made no sense at all for gold stocks to be so ridiculously cheap. Their prices weren't the result of fundamental problems, but the most overwhelmingly bearish sentiment I've ever seen plaguing any sector.

So in stark contrast to September 2011 when gold stocks were in favor if not loved, they were universally despised in December 2013. That exceedingly-rotten sentiment heading into this year makes the high-volume gold-stock rally we've seen recently all the more amazing. In GDX capital-volume 21dma terms, investors were buying gold stocks nearly as aggressively as they did heading into 2011's record highs!

This big-volume rally shows widespread buying, including from hedge funds. They are out looking for the highest potential gains in 2014, and thanks to 2013's extreme selling gold stocks are it. The best-performing sector in any given year is often the worst laggard of the previous year (assuming that its underlying earnings fundamentals remain sound). Gold stocks are poised for a massive rebound upleg.

Big-volume rallies also reveal high conviction among the investors and speculators buying the shares. Despite loathing gold stocks just a couple months ago, traders are now convincing themselves that this new rally is something very different. They have to believe the bullish fundamental case for gold, or else there is no way they'd be buying gold stocks so aggressively. This rally has a very different character.

Interestingly the GDX capital-volume 21dma trend actually began to shift in early 2013. The extreme and relentless gold-stock selling led to increasing capital flows out of gold stocks. This culminated in the absolutely massive distribution witnessed early last autumn. While it's not clear in this chart, by the time GDX peaked in mid-August's sharp short-covering rally, its capital-volume 21dma managed to hit $950m.

The giant spike up to $1420m in 21dma terms came in the subsequent selloff. Gold-stock investors and speculators almost panicked when the mid-2013 rally collapsed. They believed all the bearish hype and assumed the bottom was about to fall out of this sector as the year's brutal carnage reasserted itself. So they sold at unprecedented rates, driving the biggest volume spike the gold stocks have ever witnessed.

Provocatively this actually peaked on a rare major up day for gold stocks. On September 18th, 2013, GDX rocketed 9.0% higher. Its daily capital volume exploded to a dominating record $3.2b that day, literally off the charts! What happened? That was the day the Fed surprised by not starting the QE3 taper as stock traders widely expected. This ignited enormous relief rallies in gold, silver, and their miners' stocks.

But from a major-rally perspective, the sustained GDX capital volume we've seen in recent weeks is nearly the best of gold stocks' entire secular bull. If gold stocks continue higher in the coming weeks without a pullback, odds are this 21dma will easily eclipse $1b to hit a new rally record. It is nothing short of extraordinary to see such big high-volume high-conviction buying after December's total despair.

Being in the newsletter business, I'm blessed with endless feedback that helps me shape and refine my trading theses. Back in December when I was screaming about what an epic buy the gold and silver stocks were, I was being ridiculed mercilessly in a withering stream of e-mails. People were convinced I was an utter fool for being brave when everyone else was afraid, for buying cheap when few others would.

But as usual, that hardcore contrarianism proved wildly profitable. As of this week, the last 3 stock trades in our monthly newsletter added since November were up 113%, 33%, and 44%. The new stock trades added in mid-December to mid-January in our weekly newsletter were up 53%, 58%, and 37%. Gold and silver stocks have just soared since those hyper-bearish lows late last year, growing our subscribers' wealth.

Just 2 months later, this week I'm getting increasing numbers of e-mails from investors and speculators worried they have missed the boat! Sentiment has shifted dramatically away from the extreme fear and despair of December, and greed is starting to creep in. This mounting don't-leave-me-behind mindset is even more apparent in the high-flying junior gold stocks. Their volume spike has surged to all-time records!

GDX's little brother is Van Eck Global's Market Vectors Junior Gold Miners ETF, better known as GDXJ. This flagship ETF for small gold and silver producers and explorers currently holds a whopping 68 stocks! This includes all the major gold and silver juniors as well as many smaller ones, some of which are not even traded in the US and Canada. GDXJ's capital volume this year is gigantic, defying belief.

There are probably words beyond loathed and despised, but my command of the English language is insufficient to know them. If gold stocks in general were hated last year, the smaller ones were left for dead and abhorred. While GDX plummeted 68.8% at worst since its 2011 high, GDX's 81.4% drop dwarfed that. The junior golds were so demolished that my business partner likened it to Alice's rabbit hole.

Logic and fundamentals no longer applied, juniors were ultra-hated no matter how awesome their projects or production happened to be. Share prices cratered so low that GDXJ's custodians actually decided to execute a 1-for-4 reverse stock split right in the middle of 2013! In my decades of trading, I've never seen anything like last year's epic junior-gold carnage. It was so ludicrous we probably won't again.

You can see stock capital, the lifeblood of junior explorers, getting relentlessly sucked out of this sector in recent years in the downtrend in GDXJ's capital-volume 21dma. The selling wasn't abating, but there were fewer and fewer traders left to sell so the capital volume dwindled. By early December this metric of junior-gold-stock interest had fallen under $40m per day, a rounding error in nearly every other sector.

But when gold stocks started rallying as 2014 dawned, investors and speculators quickly started to grow interested in the abandoned juniors again. The GDXJ capital-volume 21dma soon started surging in a massive way, shattering its multi-year downtrend. And volume kept on rising, with this 21dma metric blasting to $136m this week. There was also a record trading day with $267m of raw GDXJ capital volume!

Note above that both GDXJ's capital volume and its 1-month average have never been higher since the birth of this ETF! Investors and speculators are returning to junior golds in a huge way, they've never bought this forgotten sector at such high rates before. This year's volume spikes in GDXJ are just stunning. I knew they were big before I built this chart, but my eyes popped out once I saw the actual data.

Within the space of 2 months, not very long in the grand scheme, gold stocks have catapulted from despised zeroes to rising heroes. Investors and speculators alike are flooding back into big and small gold and silver stocks at high to unprecedented rates. This high-volume buying can't just be coming from the relatively small fraction of contrarian investors, it has to be from big funds and even some mainstreamers.

And it is likely just starting. The main reason high-volume rallies are so exciting is they reveal great internal strength, which translates into momentum and staying power. The higher gold stocks are bid, the more traders want them. And the more traders want them, the more they buy. Thus the virtuous circle of prices rallying that high-volume buying drives is very exciting and exceedingly profitable.

And despite the huge gains in gold and silver stocks already this year, they have vast room to run yet. 2013's once-in-a-lifetime selling anomaly forced this sector to fundamentally-absurd levels that will take a long time to mean revert out of. While GDX is up 30.3% since mid-December, it would have to rally another 75% from here merely to regain the ground lost in 2013! The best is still yet to come for gold stocks.

GDXJ's prospects are even more bullish since these junior stock prices were battered far lower last year. Though it is already up a staggering 52.7% since late December, GDXJ would have to climb another 80% just to hit its end-of-2012 levels. And those weren't great. Regaining its all-time split-adjusted high would require another 253% of gains from here! The upside on precious-metals stocks remains vast.

While GDX and GDXJ are fine, at best they'll merely yield sector performance. At Zeal we've long done deep research to carefully handpick the elite individual gold and silver stocks with the best fundamental prospects. These fantastic companies' ultimate gains will multiply their peers', giving far more upside for investors and speculators to reap. Finding these needles in the haystack is hard work, but well worth it.

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The bottom line is this year's new gold-stock rally is exceptionally high-volume. Big capital is starting to flow back into gold and silver stocks, quickly catapulting their battered prices higher. Capital volume in the flagship gold-stock ETFs ranges from nearly the best seen in any rally in this secular bull to new records. Such strong internal strength in this rally can only mean funds and mainstreamers are starting to return.

And this is just the beginning. The wildly-anomalous gold-stock selling in 2013 was so extreme that this entire sector was hammered to fundamentally-absurd levels. So the gold and silver stocks still have vast room to rally merely to reflect today's prevailing gold and silver prices, let alone the nearly-certain large advances these metals will make this year in their own mean-reversion uplegs. Don't tarry and get left behind.