Source: Brian Sylvester of The Gold Report (8/26/11)
Chen Lin stumbled into investing. While working on a doctorate at Princeton, he turned $5,411 in his wife's retirement account into $1.5 million. In his newsletter, What is Chen Buying? What is Chen Selling?, Lin shares the fruits of his analytical aptitude. In this exclusive interview with The Gold Report, Lin reveals his latest finds in gold, and why he has high hopes for silver, too.
The Gold Report: With gold trading around $1,800+/ounce (oz.), famous precious metals investor Eric Sprott announced that he is selling 2 million units, or $30 million (NYSE:M), of the Sprott Physical Gold Trust. Sprott then said he would take that cash and put it into silver, which he called "the investment of the next decade." What do you think of his long-term silver strategy?
Chen Lin: Silver and gold are both precious metals, but they move at different times. Right now, the gold:silver ratio is a little bit over 40. Obviously, Sprott is more bullish on silver versus gold. I take a pretty even point of view. I like gold. I like silver. I know that historically the gold:silver ratio is much lower than it is right now. I checked Chinese history and it's about 10:1. Even China has much less gold than the rest of the world and is richer in silver. We could have a much lower ratio, which means silver would outperform gold going forward, but personally I'm betting evenly on gold and silver.
TGR: Another interesting development is that Venezuelan President Hugo Chavez has announced that he will nationalize all of the remaining non-state-owned gold mining operations in the country. Is this announcement likely to affect the share prices of small-cap companies operating in other countries with leftist leaders, like Bolivia or Peru?
CL: I think it's possible. What Chavez is doing will probably destroy the country's gold mining industry because it needs the juniors to lay the groundwork so the majors can dig out the gold. If Chavez nationalizes, it will probably lower the gold production. I think one day he will regret that. It will increase concerns about the political risk in countries that have those close ties to Chavez.
TGR: Recently, we saw the Dow Jones Industrial Average drop a little over 400 points in a day. What's your outlook for gold? Are we going to see $2,000/oz. gold before the end of 2011?
CL: It's very possible. I personally do not want to see the parabolic move of gold. I hope gold doesn't rise as fast as silver did in the second half of last year. But in the back of my mind, I think gold could do that. There is a dramatic difference between this year and 2008, however. In 2008, gold initially went down along with the stock market. This year gold went up as the market went down, which means investors believe gold is the place to put money. I read a report that some banks in China have low gold inventories because individual investors are buying gold like crazy. It's very possible gold goes to $2,000/oz., but I hope it goes slower. I invest in gold. I have gold exchange-traded funds, gold futures, silver ETFs and silver futures on my recommendation list. But I hope they go up gradually.
TGR: Do you fear a correction?
CL: I hope we have some correction. I expect that the margin will increase another six times before gold has a real correction. That probably will push into early next year. Usually the gold season is strong from September into Chinese New Year. A severe correction could come in February.
TGR: You've said that you are seeing a decoupling of gold stocks versus stocks in the broader market. Can you explain that?
CL: Now, when the market takes a huge dive, gold goes up. Quite a few stocks actually went up into the green. Many others are up as well. Majors will start to stabilize and move up despite the stock market going down. As things stabilize, the juniors will likely catch up. As gold moves up, gold stocks are likely to outperform gold for the rest of the year.
TGR: Your investment success is somewhat legendary. You took about $5,000 in 2002 and turned it into about $1.56M by the end of 2010. Even as your portfolio regressed this year, it's only by 10%. What's changed in 2011 that is making it more difficult to find small-cap companies poised for big gains?
CL: This year has been difficult. The resource stocks got hit as investors took profits and ran. Fortunately, I have a pretty diverse portfolio. I have stocks, ETFs and futures. It is a very difficult year for small-cap companies, but I see some great opportunities. I'm ready to buy because investors are selling gold stocks indiscriminately. This is the time to buy. There are some great opportunities for investors that have a relatively long-term vision.
TGR: On the other side of the ledger, what are you divesting yourself of right now?
CL: I have been gradually selling some gold and silver ETFs. They have appreciated a lot, so I use them as buying power on the dip on the miners. Instead of following Sprott by selling gold and buying silver, I'm reducing a little bit to use that as capital to buy undervalued small-cap gold and silver miners.
TGR: You have had success in pulp, paper and oil and gas. What other sectors do you believe are poised for growth?
CL: I like the pulp sector. There are a lot of very undervalued energy stocks, as long as oil finds a floor somewhere in the $60-$70/barrel range. China does not have enough strategic oil reserves. If oil really dips, China would probably use the opportunity to build up more oil reserves. India has no strategic oil reserve. The pressure is on both countries to stock up if oil dips. In 2008, the worldwide oil demand only dipped like 1-2%. As long as investors stay with low-cost producers with good balance sheets, they will ride out the storm.
TGR: Any parting thoughts for us?
CL: I think this market correction will create a lot of opportunity for us. The market is putting a lot of pressure on the European leaders to get their acts together. There is a lot of pressure on Federal Reserve Chairman Ben Bernanke to do another round of quantitative easing. I hope the outcome will have some stabilizing effect on the market. In the meantime, when investors are selling everything, that's a very good buying opportunity.
TGR: Excellent. Thanks, Chen.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc., publisher of J. Taylor's Gold, Energy & Tech Stocks newsletter and Roger Wiegand's Trader Tracks. Using his wife's Roth IRA account, Lin invested $5,411 in December 2002, and by December 31, 2010, it was worth $1,188,993-with no cash added. You can see his portfolio chart here.
A doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. Chen worked in the Internet and computer area where he founded a few start-up companies. After the tech bubble burst of 2000, Chen was able to move his technology portfolio into the resource sector with considerable success. Chen employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis. To subscribe to Lin's What Is Chen Buying? What Is Chen Selling?newsletter, click here or call Claudio Bassi at (718) 457-1426.
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