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

Stocks in this article: PAAS GDX GG KMB JNJ MO

Oil and gasoline prices are creeping higher and higher, putting a strain on the public's wallets. The epic drought in virtually the entire U.S. is causing grain crops to wither and contributing to the rise in the cost of food. The price of corn is up almost 40% this summer alone, according to some reports.

Yet, in spite of the inflationary pressures on the economy and in the absence of really positive date, all the stock market averages were higher on Thursday as well.

Economist and oft-quoted author Marc Faber recently appeared on CNBC's "Fast Money" program on Wednesday. He surprised his hosts by saying, "We could go to 1,450 or even 1,500" on the S&P 500.

"In the U.S there have been a few strong stocks such as Kimberly-Clark (KMB), Johnson & Johnson (JNJ) ... and Altria (MO)," he opined.

"They have all made new highs," he added. "Also, there are some deeply oversold stocks, mostly economically sensitive companies such as miners." The very next day the miners exploded to the upside.

Faber said that if investors continue to "stick with what's working" and also bid up some oversold stocks, the market could rally higher. "We could go to 1450 or even 1500," he says.

The CNBC interview and article referred to Faber's belief that any advance will be a false rally. At 1450-1500, he said the S&P 500 will be at the top of the range. Faber's proprietary research suggests to him that "we're in the late stage of a mature market and not a new bull."

From those levels he sees a meaningful market correction coming. Faber estimates the S&P 500 could trade down about 150 points from where we are now to about 1250. However, at 1250 he thinks the potential of a Federal Reserve intervention (aka QE3) would then set a downside floor.

If Faber is correct, and if recent history repeats itself, the precious metals stocks may rally for a while longer, only to be caught in that inevitable market downdraft that will be used by the Federal Reserve as one of the big reasons a massive new round of quantitative easing should begin. Time will tell!

At the time of publication the author is had positions in PAAS, GG, and GDX.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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