A Terrible Time for Gold & Silver Miners

But that creates lots of high-value opportunities says this analyst...
 
CHEN LIN writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling? for Taylor Hard Money Advisors, Inc.
 
While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his PhD on the back burner. He employs a value-oriented approach, overlayed with market timing via technical analysis of price charts.
 
Here he tells The Gold Report what he looks for to make the critical purchase decision, and why he believes that platinum and palladium should do well regardless of what is happening with gold and silver.
 
The Gold Report: As you noted in your last interview with The Gold Report in February, Goldman Sachs was predicting that gold would to go down to $1200 ($1200 per ounce) in several years, and now "Dr. Doom," Nouriel Roubini, says it's going to $1000 per ounce. What's your view?
 
Chen Lin: In the near term, I think gold is being controlled by the paper market on Wall Street, which is unfortunate. However, I'm still bullish for the long run.
 
TGR: Do you see anything on the economic horizon that could create a more positive environment for gold in the near term?
 
Chen Lin: Personally, I'm not sure all the problems are behind us. Japan just had a big swing in the stock market and is going through a risky experiment to do a quantitative easing (QE), which is actually on a much larger scale than that of the US.
 
I think Japan, for the next few months if not year or two, will decide how successful QE can be. Japan is doing much, much stronger QE than that of the U.S, which has 100% debt to gross domestic product (GDP). Japan has over 200%. So actually it's a blessing to the US to see what is going to happen with the Japanese experiment. I think that will be a key indicator for the longer term effectiveness of QE.
 
TGR: What do you think is going to happen with silver in light of the gold price predictions?
 
Chen Lin: Silver has been more volatile than gold. I'm also bullish long term on silver. But near term, there could be more downside because investment demand is down and there could be a surplus this year. Only investment demand can pick up the surplus. So if the demand is not here, we could have more downside with silver. Again, I'm watching the exchange-traded fund inflow and outflow very carefully to see the investment demand for both gold and silver.
 
TGR: What part of silver demand do you think might be due to industrial uses versus investment or speculation?
 
Chen Lin: Demand has been picking up especially for electronic components, but the total production in silver is much greater than industrial demand. The surplus has to be absorbed by either jewelry, which is limited, or other investment demand.
 
TGR: You talked last time about your more positive outlook for base and industrial metals. Does your outlook remain the same?
 
Chen Lin: I'm still bullish on platinum and palladium. Both the European Union and China will have new car emission standards starting in January 2014. I believe the car manufacturers will start to stockpile those metals in the second half of 2013. Plus, we have South African labor issues and then Russia finishing up stockpiling palladium. I'm bullish on both metals, and I have been holding both.
 
I actually turned quite bearish on base metals earlier this year, right after the February interview, because I saw rapid slowing in China. I even told my subscribers to write a note to themselves saying China is slowing down and then put it on their monitors so they would be reminded every time they trade. I believe this is a major change in the commodity market, and it can play out for years.
 
As I stated in my newsletter, I shorted copper as a trade. I also shorted the Australian Dollar, oil and US government bonds. I've already closed the Australian Dollar short for a nice profit. I shorted it when it was trading at a $1.05 premium to the US Dollar and now it has gone down to $0.92. So, generally, I turned very bearish on base metals, but I'm still bullish on the platinum group metals – platinum and palladium.
 
TGR: How are your current price expectations influencing your investment strategy and stock picks at this time?
 
Chen Lin: Because of the near-term uncertainty and with summer coming, which is usually the weakest period for gold and silver miners, I'm actually trying to stay light on both silver and gold miners except in special situations. For the miners, I focus on those that can be self-funding and do not need to come to the market to issue shares that dilute existing shareholders.
 
TGR: Can you tell us how your gold and silver stock portfolio has been doing since last February and how you've been coping with this choppy market?
 
Chen Lin: My portfolio has done terribly this year for gold and silver miners. As I told my subscribers, when gold and silver started to crash in early April, I pulled back and I moved the capital to hotter areas, like biotech. I'm still keeping some positions in gold and silver miners, and I believe one day the market will turn around.
 
TGR: So what kind of strategy should investors be looking at now when it comes to precious metals investments over the next few months?
 
Chen Lin: I'm cautious on gold and silver mining because the end of June is the end of both the quarter and the half of the year. There could be more fund redemptions in the near term. But I like special situations. So those kinds of special situations exist for those investors who are willing to look into the market. The first thing for investors in this brutal bear market is to stay alive. I believe there will be great opportunities waiting for us.
 
TGR: Do you think any of these companies are takeover targets at this point or do the potential buyers have too many of their own problems to be worrying about takeovers?
 
Chen Lin: That's a great point. The majors are having problems. They are facing management changes and shareholder revolts. There may be some takeover targets, but I would first want the company to be self-funding and self-growing, and there will be winners coming out of this correction.
 
TGR: Any other thoughts that you'd like to leave with us on the precious metals?
 
Chen Lin: The gold and silver miners are going through a terrible time. Some of the problems are due to the weak gold and silver price, but a lot are due to mismanagement. The miners could be weakened further as we head into the summer, which is the traditional weak season. This is truly a stock picker's market because people are throwing out the baby with the bath water. Right now, I'm focused on special situations. The one thing I hope comes out of this correction is that miners learn lessons from their past failures and that they can run lean and efficiently. Then if gold and silver take off, we can have some huge rallies in the stocks, just as in 2009.
 
TGR: Managements tend to get overly optimistic when things are going well, just like real estate investors. Then when things get tough, they learn lessons.
 
Chen Lin: Let's hope they learned the lesson. There has been a lot of incredible mismanagement.
 
TGR: Thanks for speaking with us today, Chen. We appreciate your updates and hearing about your current expectations.
 
Chen Lin: Thank you.

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