Gold Mining have lagged the metal's price too long, says this successful investor...
A DOCTORAL CANDIDATE in aeronautical engineering at Princeton, Chen Lin found his personal investment strategies were so profitable, he put his PhD on the back burner, says the Gold Report.
Between Dec. 2002 and May 2010, Chen Lin turned his wife's Roth IRA retirement savings from $5,411 into $869,846 – without adding a dime in new funds. Today, after working in the internet and I.T. area, and employing a value-oriented approach plus exceptional technical analysis, Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling? for Taylor Hard Money Advisors, Inc.
Here he tells The Gold Report why he thinks Gold Mining stocks are set to follow the metal's price sharply higher very soon...
The Gold Report: In 2002, you turned a little more than $5,000 into a portfolio worth close to $1 million in 2010. I am sure many people ask how you did that. Do you think you could repeat that success again in the current market conditions?
Chen Lin: It's one of the many accounts I am managing; in general, the accounts I manage have had similar performances; some more, some less. The results of my wife's IRA are published on miningstocks.com. There you can see it's pretty much consistent – about 100% a year average in the past seven or eight years. There are down years, like 2008; I was down by 5%; but in 2009, I was up 500%, so it was a very big year. The average is still at about 100%, maybe a little more.
TGR: You were down only 5% in 2008? That's pretty good for that year.
Chen Lin: Yeah, you can see the exact figure on the site. I lost about $50 of every $1,000 invested.
TGR: Do you think you could do it again in the current market?
Chen Lin: There's always a bull market somewhere; I am hoping this can continue.
TGR: What would it take to do that? How would you go about it?
Chen Lin: I don't focus on only one stock; I buy stocks in the sector that I really like. I compare all the sectors, their fundamentals and the stock valuations and the company's earning power, then I decide where to put my money.
TGR: And what did you decide?
Chen Lin: There was a period when I was in energy a lot and another when I was in base metals. Earlier this year, I was in energy and paper pulp. Those were actually a pretty big success. Right now, we have the Greece problem spreading all over Europe; and because of that gold will do very well.
In May, I started to advocate that people take money off the table. In early May, I was very rapidly selling. And then, when we had cash, I started buying gold stocks; I started recommending those in late May and in June.
Why was that? Because there was a very big market correction, and a lot of people were scared. People seemed to think there would be a repeat of 2008. However, I believe gold has much stronger fundamentals. And then people were selling in May and going away, just like many people on CNBC were saying. That created a very good opportunity to buy gold stocks in late May and June. When they finished selling, we went in and bought cheap stocks.
TGR: Another thing you mention in your newsletter is that after the Great Depression, gold stocks started their climb after the second market correction.
Chen Lin: Exactly, yes. That's another thing that really makes me feel confident gold stocks will likely soon take off.
TGR: When do you see that second correction happening?
Chen Lin: Oh, the second correction has already happened in the general stock market. You can see that the market's been very, very volatile since the Greece crisis, and spreading to the PIIGS (Portugal, Italy, Ireland, Greece, Spain). I believe the second correction is starting and, in the Great Depression, the major gold stocks took off just after the second phase. I hope that will repeat, maybe even be better; because before the Great Depression, we had gold-backed currency. This time, they're fiat currencies – paper currencies. And once people start to lose faith in paper currencies, gold actually is the only place for them to go. And during the Great Depression, gold had a fixed price; this time, the Gold Price can go much higher.
TGR: Your portfolio is heavily weighted in precious metals; what are some other sectors you like?
Chen Lin: One particular sector I really l like is pulp and paper. It's a unique sector with not a lot of people paying much attention. But there's a couple of trends that are very favorable for pulp; since the crisis in 2008, all the new pulp and paper projects were cancelled or delayed indefinitely, so there's no new pulp projects coming until 2012. In the meantime, the largest pulp and paper consumer is China. It's growing about 10% a year. You can see it's a surprising amount. Without much supply coming into place, the pulp producers can make a lot of money in the next three years.
TGR: Alright, your portfolio has gone up something like 16,000% since 2002. You've identified precious metals as a sector that you want to be in. You see the second market correction as happening now, much like what happened in the 1930s after the big crash in 1929. But anyone can invest in gold stocks and not have your kind of success. What do you looking for in companies that makes you trigger on those stocks?
Chen Lin: Actually, you raise a very good point. Individual gold stocks didn't go as high as gold. The gold stocks are lagging gold, which is a very interesting phenomenon. You know, we've traded commodities for a pretty long time, and usually commodity stocks go up exponentially to the commodity price, because each time the commodity price goes up, the profit margin just goes up exponentially.
For example, Gold Mining producers' average cost right now is probably around $500. Back a few years ago, in 2007 the Gold Price was $600; you make a little bit of money. Then in 2008 you have $800, and you make a little bit more. Now it's at $1200 an ounce. Every Gold Mining producer is making an incredible amount of money, and the market doesn't appreciate that much. That's a very interesting phenomenon.
One thing will happen – either gold has to come down significantly or gold shares will go up significantly. I believe it's the latter; so, we could have a phenomenal gold run. I don't know when, but it could happen this year; it could happen next year. People will look at it and say, "Wow, that's a great run on Gold Mining stocks." It hasn't happened yet; we have actually seen gold stocks come down from the beginning of the year. As I was telling my subscribers, "Okay, just buy these bargains, buy these gold stocks." Traditionally, gold stocks are weak in June, July and August. In these three months, I want to load up as much as I can on gold stocks and I'm looking for a breakout after.
TGR: But are you looking at cash flow, earnings per share, ounces in the ground, management, jurisdiction, metallurgy – what are you looking at?
Chen Lin: That's a very good question; it's changing from time to time. Of course, jurisdiction is always very important because if someone comes to confiscate your mine, you're finished. Right now, we are in a bear market; cash is king, so I want to look at cash flow more heavily. If you have a significant cash flow – especially free cash flow – after all capital expenditures are paid, that's real money. That is very important to a company.
However, if market conditions improve and we have a blowout gold market, then you may want to look at how many ounces are in the ground – those will weigh more and more heavily (in an investment decision). But right now, we're in a defensive mode; so we're putting more weight on cash flow.
TGR: Another advantage you have over other newsletter writers is that you know people on the ground in China. We're told all kinds of things about China here, some of which are true, some are partially true. What's really going on there?
Chen Lin: The Chinese government has tried to put on the brakes, to slow down the red-hot economy. At some point this year, they're going to let their foot off the brake; they don't want the economy to really go down. They just want to slow it down. They're trying to crack down on the real estate speculation; the housing prices are coming down, which is a good thing. They probably want it to correct 20-30%. It's creating some interesting opportunities for traders.
TGR: You said it was creating some interesting investment opportunities. What are some of those?
Chen Lin: Well, Wall Street and CNBC always exaggerate – they see a small correction, and they say it's a crisis. Part of it is the news media always wanting to catch your ear. But if you know what really goes on, you can buy when everybody thinks something is finished. Then you sell when sales start turning up, and then everybody in the news media says, "Oh, the correction is over!," and you can take profits. So, that's how we create a lot of trading opportunities.
TGR: You go against the popular sentiment? Is that what you do?
Chen Lin: It's not exactly against; I go with my own sentiments. When I see it is overvalued, I sell and, when I see it as undervalued, I start to buy. The more undervalued, more I buy. But sometimes when it goes down, you don't know where the bottom is.
TGR: What are some companies that are benefiting from the current economic conditions in China?
Chen Lin: Pulp and paper stocks will benefit. And the energy stocks – I owned some, and I want more focus on land-based drilling after the BP disaster. Actually, I sold all of my ocean drillers when news of the BP disaster first came out. When they first said the oil leak was 1,000 barrels, I started selling everything because I know it is impossible to leak only 1,000 barrels per day (bpd) in that gusher. I'm a pretty cautious person and, when I see that something goes wrong, I try to get out as soon as I can. That's my own money.
TGR: Any thoughts before you leave us today?
Chen Lin: We could have an incredible run for Gold Mining stocks; it will happen at some point. It could be this year or it could be next year, but I see it coming.
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