-- Posted Friday, 2 December 2011 | | Disqus
Investors focused on picking the next ailing economy have reinforced gold as the ultimate refuge if all the financial juggling fails. In this exclusive interview with The Gold Report, Chen Lin talks about the effects of risk aversion on the performance of gold stocks. While it has been a tough year for precious metals stocks, smart investors should be looking for promising stories as others decide to clean house for tax purposes.
The Gold Report: When you last spoke with The Gold Report in August, the gold:silver ratio was about 40:1. Today it's about 53:1. In August, you were looking for a lower gold:silver ratio that you thought would probably be more reasonable under the circumstances. Yet it seems to have gone the other direction. What do you think has happened here? Was silver drastically overpriced or not able to keep up with the gold?
Chen Lin: In the last interview, I was pretty evenly bidding between gold and silver. I don't have a particular preference. At that time, there were some major funds buying silver. Historically it has been lower—as low as 10:1 a very long time ago. But, right now, it's in a reasonable range. So, I'm not saying that one is overvalued and the other is undervalued. Silver has some industrial components to it while gold is mainly monetary. I'm personally looking for the silver:gold ratio to go lower over the long run. Right now, the financial crisis has pushed central banks to actually start buying more gold in the past quarter. So, that's probably keeping the gold price higher.
TGR: So, what you're saying is the European debt crisis is the thing that's really driving the gold price higher.
CL: Two or three of the central banks have put a historical amount of gold on their books, which tells you there's more focus on gold because of the European crisis.
TGR: What do you think is going to happen with metals prices if this Eurozone situation deteriorates further?
CL: That's a hard question. I think it's in the hands of the policymakers. When Greece said we're going to do the referendum and that Greece could be kicked out of the Eurozone, the Greek people were rushing to their banks to get the euro out. If the euro starts falling apart, I think gold could be one of the hard assets people in Europe will try to get their hands on. That could be very positive for gold. I can see Germany give in to the other euro countries and basically agree to use the European Central Bank to print money. That's probably the most likely outcome. That would delay the crisis and investors would focus on other countries such as Japan and the United States. Then Europe may quiet down a little bit. But, that would be very positive to gold as well. Gold can potentially have a very explosive move on the announcement.
TGR: You've had pretty spectacular performance since you started your portfolio with about $5,000. In August, it was down about 10% for the year. What's happened here in the last three or four months?
CL: It's been down between 10% and 15% so far, it has been quite flat this year. Considering that I own a lot of junior stocks, those stocks can be very volatile.
TGR: What are your expectations as far as market performance in the last weeks of the year? Then what happens next year with the precious metals and mining stocks?
CL: A lot depends on the European solution. I think the most likely result would be a massive money printing in the Eurozone. That would be very positive for gold. As far as gold mining, we have seen the general lack of capital in mining stocks. That's why I try to stay with companies with a strong cash flow. Many exploration companies and emerging producers are trading at very low valuation. Still, the market doesn't give them recognition. If we have any solutions in the Europe situation, these stocks can have a huge run.
TGR: Are there any other parting thoughts you might want to leave with our readers as far as how they should be playing this market?
CL: Gold stocks are extremely undervalued right now versus the gold price. I personally believe that gold will go much higher. How high will gold stocks go? I think this depends on market conditions. Gold stocks have two faces. One is related to gold. The other is related to the capital markets. Mining companies need to raise money to produce gold. It's a very capital-intensive industry. So, if the capital market doesn't improve, gold mining stocks may lag behind gold for some time. But, once we have some stabilization, I can see some extremely undervalued gold stocks out there. Another idea to think about is to try to follow what the majors like. Majors are flooded with cash and can afford to pay a reasonable market price for a property. So, I think it's probably a good time to follow the trades of the majors.
TGR: You've given us some good information and food for thought. Thanks for joining us today.
CL: Thanks for having me.
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 Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
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-- Posted Friday, 2 December 2011 | Digg This Article
| Source: GoldSeek.com
