Gold and Silver Stocks Regain Their Luster, but Will It Last?

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Between Election Day and the end of the year, physical gold and silver, along with the miners that produce these precious metals, were absolutely clobbered. For instance, physical gold, which hit an overnight high of $1,340 per ounce once it appeared Donald Trump was on the path to securing a win, tumbled to the $1,120s per ounce in late December. In fact, gold wound up falling for seven straight weeks post-election, marking its worst downturn in 12 years.

However, the new year has brought new luster to physical gold and silver, as well as its underlying precious metals. Here's a snapshot of some of today's biggest moves:

• First Majestic Silver (AG 4.12%): up as much as 15%
• Coeur Mining (CDE 8.45%): up as much as 13%
• McEwen Mining (MUX 2.21%): up as much as 13%
• IAMGOLD (IAG 6.30%): up as much as 11%
• Northern Dynasty Minerals (NAK 1.60%): up as much as 10%
• Alamos Gold (AGI 2.51%): up as much as 13%

Today alone, physical gold is higher by nearly $17 per ounce, to $1,180, which would mark a better than one-month high in the yellow metal. Silver's move is a bit more modest, with a $0.14 per ounce increase (just below 1%) to $16.55 per ounce.

Why gold and silver are surging higher

What's responsible for gold's and silver's surging per-ounce prices? For starters, a falling U.S. dollar helps. The dollar tends to move hand in hand with the U.S. economy, meaning a rising dollar denotes strengthening GDP growth prospects in the United States. Since gold tends to do well when there's economic uncertainty, a falling dollar inflates gold's prospects, and silver usually follows suit.

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We've also witnessed a sizable pullback in Treasury yields over the past couple of weeks. On Dec. 16, the U.S. 10-year note hit a yield of 2.60%. As of 2:30 p.m. EST, the 10-year note had a yield of just 2.37%, implying that bond buyers have returned. Remember, bond prices and yields head in different directions. As with the movement in the dollar, this dip in yields could just be a breather after yields moved more than 80 basis points higher in a matter of a few weeks.

The reason Treasury yields matter is because of opportunity cost. Opportunity cost is the act of giving up a near-guaranteed return in one asset, such as a U.S. Treasury bond, in favor of an asset with a higher return potential, like gold or silver. The thing is, neither gold nor silver pay a dividend. This means the yields of interest-bearing assets, like bonds, CDs, and savings accounts, need to remain unattractively low to spur gold and silver buying. As long as this trade-off remains low, gold and silver should do well.

It's also quite possible that weak holiday sales figures from retailers like Macy's and Kohl's could be sparking today's rally in gold. Both behemoths reported weaker-than-expected year-over-year sales slumps, with Macy's announcing the layoff of more than 10,000 workers in the coming months. Since the U.S. economy is more than 70% consumption-driven, weakness on the retail front could be great news for gold and silver.

Lastly, there's still uncertainty surrounding Donald Trump's upcoming presidency. With no political or military background, there are clear concerns that his policies and trade negotiations could hurt, rather than help, the American economy.

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The rally could last for these mining companies

While precious-metal investors are undoubtedly enjoying today's rally, the big question remains: Will this rally last? I believe the answer to that can be found in the fundamentals of the aforementioned biggest movers today. Many of them have done an admirable job of cutting costs, and in some cases, boosting production. A few, though, are still best avoided, even with a nice rally to begin the year.

First Majestic Silver, Coeur Mining, Alamos Gold, and McEwen Mining belong to the first column of companies that could motor higher.

First Majestic's most recent quarterly report featured a 27% increase in silver equivalent production to 4.5 million ounces, all while all-in sustaining costs (AISC) fell 27% to $10.52 per payable silver ounce. Aside from favorable currency movements, First Majestic Silver benefited from renegotiated smelting and refining agreements and record silver production, on the aggregate, from its six producing mines. The star continues to be Santa Elena, which, with by-product costs included, produced silver at an AISC of just $1.82 per ounce in Q3 2016.

Silver miner Coeur Mining wasn't able to deliver the cost-cuts of First Majestic Silver because of a number of ongoing projects, but it certainly impressed in other areas. For example, Coeur managed to reduce its outstanding debt by 21%, or $109.3 million, during the third quarter, pushing its total debt to adjusted EBITDA ratio down to 2 from 5.5 in the year-ago period. Even though its adjusted AISC rose 17% year over year in Q3, Coeur is expected to initiate production at Jualin in 2017 and ramp up Independencia throughout 2017, meaning higher production seems imminent (as does an eventual reduction in AISC).

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Alamos Gold, on the other hand, has only seen modest production growth, but it's really made a dent on the cost side of the equation. In the third quarter, Alamos reported an AISC of $979 per ounce, which was down from $1,155 per ounce in the prior-year period. Much of this was achieved through cuts in capital expenditures at its three producing mines. However, Alamos did announce in September that its developing La Yaqui mine has nearly twice as many resources as first believed, so there's reason for shareholders to be excited about the future.

Even McEwen Mining could continue to scamper higher despite its reliance on just two mines. Lower-than-expected costs at its El Gallo mine helped push the midpoint of the company's gold AISC down to just $780 in the third quarter from a previous midpoint of $857.50 per ounce. What's more, McEwen has no debt, and it's on track to potentially bring two new mines online over the next two-to-three years. Sometimes these small treasures can offer the greatest rewards.

Be wary of these precious-metal miners

On the other hand, precious-metal investors would be wise to keep their distance from Northern Dynasty Minerals, and perhaps IAMGOLD, as well.

IAMGOLD, as I discussed recently, isn't necessarily a bad company. Gold production rose by 7% in its most recent quarter, primarily a result of rapid growth at its Essakane mine in Burkina Faso. However, IAMGOLD's exposure to higher labor costs and political instability in West Africa make it a risky bet in the gold industry. The company is currently forecast to generate an AISC of $1,075 per ounce, which means it has one of the smallest margins relative to spot gold of its peers. It wouldn't take much to push IAMGOLD to a quarterly loss at this point, which is why I'd be a bit skeptical of this rally until gold prices are considerably higher and its AISC a bit lower.

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However, Northern Dynasty Minerals is a company I'd suggest avoiding at all costs. Northern Dynasty is a developmental-stage company, and the Pebble Project essentially represents the bulk of its valuation. The problem is this: Developing Pebble may not be economically feasible, regardless of its measured and indicated resources. Even if Northern Dynasty Minerals finds a path to develop Pebble, it has nowhere near the hundreds of millions, if not billions, of dollars it would take to make Pebble a top-producing mine. There's no guarantee Northern Dynasty Minerals has what it takes to survive over the long run, which is why I'd call this latest rally fool's gold, with a lowercase "f."

I believe there are reasons to expect gold and silver to move higher, but you've got to be pickier with the companies you choose to include in your portfolio, or you could be disappointed.