Gold Mining: Can Your Stock Bear $1000/Oz?
Wednesday, 1/15/2014 10:27
Gold mining stocks can't hide behing rising prices any more...
CHEN LIN writes the popular stock newsletter
What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc.
While a doctoral candidate in aeronautical engineering at Princeton, Lin found his investment strategies were so profitable that he put his PhD on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
Now Chen Lin says that, for over a decade, mining companies have relied on a rising gold price to reward their decisions, regardless of whether they were smart. But those days are over, and Lin says that gold mining investors must embrace companies able to grow their balance sheets even with prices as low as $1000 per ounce, as he explains here to
The Gold Report...
The Gold Report: You told us in June that you were still bullish on gold "in the long run." Are you still bullish? And how soon is the long run?
Chen Lin: Gold may continue to correct in 2014 and maybe even longer. There is a chance it will hit $1000 per ounce. However, inflation will pick up as the result of all the money printing by the central banks. That's when gold's run will really begin.
TGR: You've said that the price of gold is being controlled by the "paper market on Wall Street." Could you elaborate on that?
Chen Lin: You can use very little money down to buy gold using the future markets. This leverage is guaranteed by the biggest financial institutions in the United States and the world. In turn, those financial institutions are guaranteed by taxpayers. So the gold price has really been controlled by the paper-market traders. But this could change.
TGR: Isn't gold supposed to be a real thing that cannot be duplicated endlessly?
Chen Lin: There is a difference between physical gold and paper gold. But traders see gold as no different from other stocks. There are a lot of things going on we won't know until later.
Right now, China is the biggest gold bullion buyer. And the gold price will probably peak around the Chinese New Year, which is at the end of January. How much further it will bounce from there, it's hard to say.
TGR: Are you worried about China's future?
Chen Lin: I'm very concerned. The housing bubble is showing signs of bursting. A lot of empty apartments have been built and are still being built. The strain on the Chinese banking system is very high. In the past few months, most of the banks have not been able to issue mortgages because they don't have the money to lend.
TGR: I've seen it reported that there is far more quantitative easing in China than anywhere else, most of it unofficial.
Chen Lin: China's central bank is not very transparent. At least with Ben Bernanke we know how much money the Federal Reserve is creating. In China, this is a state secret. But the money printing in China is enormous, really massive. The Chinese private investor is right to buy physical gold, just in case something blows up.
My concern is that if China really runs into some trouble, the gold price will get hit because China is the largest gold buyer. We saw this during the Asia crisis of 1997-1998. Back then, people were selling gold, silver and even kidneys, believe it or not, to survive.
TGR: How much of the current woes of the precious metal equities can be blamed on low prices and how much on mismanagement?
Chen Lin: Bad management teams deserve a lot of the blame. They pay themselves a lot of money. They live lavishly. Most are overaggressive. They buy properties at the top of the market, and they raise money at the bottom. They constantly issue more shares, which kills investor confidence.
But the brokers are guilty, too. Every day they try to talk management into raising capital because they get commissions. And if management doesn't issue shares, it usually get less coverage. That's the link. It's as if miners are paying commissions for coverage.
TGR: Is there a herd mentality at work?
Chen Lin: As they say, when everybody's buying, you should consider selling. When gold reached its peak in 2011, everyone thought the price would go up forever.
TGR: Do you think tax-loss selling will depress
gold mining equities even further?
Chen Lin: A little, especially for the small caps.
TGR: Could this bottom lead to a rally?
Chen Lin: It's possible. Some of the better gold companies are quite cheap. Unfortunately, they are not buy-and-hold candidates because if this market climate continues, it will be very difficult for them to raise money. And when companies raise money in this market, existing shareholders get taken to the cleaners.
TGR: What are the fundamentals mining companies need to possess in order to prosper in volatile metals markets?
Chen Lin: A prudent management that can execute and deliver. A property that can produce at low cost, can withstand gold's volatility and can generate free cash flow, even at $1000 per ounce gold.
It's not just about cheap ounces. It's about seeing a balance sheet that increases every quarter. Companies like that can expand their operations and buy neighboring properties now at very depressed prices. Companies like that will make a lot of money in the long run.
TGR: Regarding takeovers, are you surprised we haven't seen more, especially considering how prices for juniors and mid-caps have fallen?
Chen Lin: Most of the gold mining majors are in disarray and are not in the position to acquire properties, even though, as you say, prices are cheap. But, if the price of gold remains stable for the next year or two, I would think that many of the majors may be able to repair their balance sheets and start buying again.
When the market is bad, we hear about the problems associated with new projects: permitting, feasibility studies, etc. But in a good market, a lot of these properties would already have been bought out. It all depends on the market, and right now the market is very tough.
TGR: Could some of the juniors that have been battered in 2013 make big comebacks in 2014?
Chen Lin: To make big comebacks requires a change of market sentiment. Will the market sentiment change this year? I do not know. It's an open question. Obviously, investors want to see their stocks come back big time. They want to make all their losses back in one year. I think investors need to be patient.
TGR: Considering a bear market of longer than 2.5 years, many investors think they've been more than patient already.
Chen Lin: But only time will cure a lot of the mistakes that have been committed in this market. When you have companies that keep their heads down, generate cash flow and continually improve their balance sheets – that's what will ensure big winners when the market sentiment changes. Companies like these are in the position to acquire good properties on the cheap.
TGR: Did you personally take a big hit this year?
Chen Lin: I've taken a lot of hits in the gold miners. In gold bullion, I bought in the summer when the price was low. Then, when it hit $1400 per ounce, I told my subscribers I was selling. That was a very nice trade.
In general, I've been fortunate because I've been trading my position, and I've been underweighting gold since 2011 because I saw some subtle problems with the gold mining industry in general.
TGR: What have you learned this year?
Chen Lin: I've been trying to trade more actively instead of buying and holding. I've held some miners that have been hit very hard. Do I look back and wish I'd sold all my shares of gold companies in 2011? Probably. But I want to keep some positions, even though it's painful. When the market turns, I expect to be rewarded for all this pain and suffering.
TGR: Chen, thank you for your time and your insights.
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