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 Chart 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.

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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