Big Breakout for Precious Metal Miners or Just Another False Start?

NEW YORK (TheStreet) --This isn't the first time, but today's leap forward in the prices of companies that produce, mine or are streaming middlemen for gold, silver and copper was downright impressive.

My concern is that we've seen this kind of performance before, only to see the sector fizzle and fade. Yet, what has me intrigued at this point is not that companies like Pan American Silver (PAAS) skyrocketed almost 7% in one session on 50% higher-than-normal volume.

Nor that top-tier gold and silver producer Goldcorp (GG), with a market cap of over $31 billion, rocketed almost 5% higher, although on lower-than-normal volume.

It was the fact that almost every mid-tier and large-cap company in the entire precious metals (and semi-precious metals like copper) have been climbing off the bottom for several weeks, and yet they still leaped like a frog off a hot August pavement.

Perhaps this sector rally was long overdue. Many of the companies like Pan American have been trading for five or six times earnings, while the underlying precious metals prices have stayed locked in a tight yet lucrative range.

Take a look at a chart of the Market Vectors Gold Miners ETF (GDX), which also was up 3.4% on the day on lower-than-normal volume.

In the chart below I compare it with the two most popular ETFs that track the price of gold and silver.

GDX data by YCharts




The chart shows clearly that GDX and the sector haven't participated in the long rebound for gold and silver prices from the lows during the 2008 financial meltdown. From gold's low during 2008 of just above $500-an-ounce it has more than tripled, closing Thursday at around $1,615 an ounce.

My point is that the gold and silver producers sector isn't that much higher, and certainly nowhere near double or triple the levels of four years ago. Production costs are higher today, yet even with that and other factors considered, this is a sector that was and is overdue for a bounce.

Thursday was a day when the 10-year Treasury bond sold down again with the yield stretching up to 1.84%. Mortgage rates are tied to the yield on that Treasury bond, and they've moved higher this week as a result. That's not good news, and may help account for the rally in precious metals.

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