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Chen Lin Says Gold Miners Need to Produce at $1,000/oz or Less to Survive

 -- Published: Monday, 17 November 2014 | Print  | Disqus 

Source: Kevin Michael Grace of The Gold Report  


How low can gold go? Chen Lin expects a probable near-term low of $1,000/ounce. The author of the What is Chen Buying? What is Chen Selling? newsletter says that at that price we can expect a bloodbath of companies, both large and small. Gold cannot be kept down forever, however, and once the bottom is in, those miners that have survived will be in an enviable position, able to buy lucrative assets at bargain prices. In this interview with The Gold Report, Lin explains where he thinks the precious metals market is heading.


The Gold Report: You've discussed in your newsletter Goldman Sachs' plan to "push gold [down] to $1,000/ounce" ($1,000/oz). How do you know such a plan exists?


Chen Lin: I am not a big fan of conspiracy theories, but Goldman published a report in early September calling for $1,000/oz gold by the end of 2014. As I saw it, this call was quite aggressive. Goldman will lead and probably has been leading a group shorting gold aggressively.


Kitco has published a report arguing that should gold fall to $1,000/oz, this would be catastrophic for most gold miners. The shorts, unfortunately, probably don't care about gold mining companies and the jobs of those who work for them. They just want to make money. If the gold miners go under, they'll be very happy.


TGR: We've heard about these short attacks for at least a year and a half. How long can they keep winning this game?


CL: That's a very good question. There is, however, another reason why gold has declined in price: its reverse correlation with the U.S. dollar. The dollar has recently been strong, so gold has been weak. And the shorts are making money on this.


I see the fall of gold from $1,900/oz to be a healthy correction. This creates buying opportunities for long-term investors. As I told my subscribers, I started to underweight gold and gold miners back in 2011–2012. I hope my subscribers took my advice and have survived this nuclear winter of gold miners. We continue to look for the bottom. This year, in particular, I have increased my efforts to visit gold mines and meet with gold mining company executives, so I can be prepared when the gold market turns.


TGR: The U.S. Federal Reserve is tapering quantitative easing (QE), but just recently the Bank of Japan announced an enormous QE plan. Shouldn't this be very good for gold?


CL: It should have been, but what happened was that Japan's QE lowered the value of the yen and strengthened the dollar. So investors sold gold on the QE news. It's a paper-market game. All these funds don't own gold at all. They're basically borrowing gold to short it. They borrow from some other place, maybe the central government, maybe from exchange-traded funds (ETFs), whatever, I do not know. This game will end, but the question is when.


TGR: What are we hearing about physical gold sales in Asia?


CL: Physical gold buying has been quite strong in China, although not as strong as last year, partly because China's economy has been slowing down. Gold buying in India has been very strong, and the Indian economy is actually picking up. These are the two largest gold-consuming countries. I believe that eventually physical demand will gradually absorb all the shorts' positions. Then the gold market will turn. China bought about 1,000 tons (1 Kt) of gold last year. The U.S. claims to have about 8 Kt gold. It's in Europe where there's a large position. So this turnaround will take a few years.


TGR: On Nov. 7, gold fell to a low of $1,130/oz. Then it rose $47 for the rest of the day to finish at $1,177/oz, a 3.15% increase. Was what happened that day a one-off, or does it perhaps suggest the bottom has been reached?


CL: I wish I could tell gold investors the good news that everyone is waiting for, but I'm not so sure. From the macroeconomic point of view, the U.S. dollar will likely be strong for the next two to three years because the U.S. economy is one of the strongest, if not the strongest, in the world. This year, the shorts may not be able to push gold all the way to $1,000/oz ahead of Christmas and the Chinese New Year, which is a very strong gold consuming season, but they may come back again next year in the summer.


TGR: What do you make of the talk that American sanctions against Russia have pushed Russia into an alliance with China and that this alliance plans to create a new reserve currency to rival the U.S. dollar?


CL: I don't think Russia and China together could create a currency to rival the U.S. dollar. Sanctions and the drop in the oil price have pushed Russia toward China. I don't think they will become allies; their systems are too different, and they are historic rivals. But they will be friendlier.


TGR: Gold heading toward $1,000/oz has resulted already in decreased production, and this decrease will become significantly greater over time. Shouldn't this result in a significantly higher gold price?


CL: Over the long term it will. In the short term, however, there's a large quantity of gold in storage. Annual production is minimal compared to stored gold.


TGR: Do we really have any idea how much gold exists? If the world's gold is endlessly loaned out and rehypothecated, is this a shell game that can run and run?


CL: I don't know how much gold really exists. Many people put money in ETFs, which may not own gold. But most investors don't regard gold as a long-term investment; they regard it as a trading vehicle. This situation won't change until the world recognizes gold as currency.


TGR: The silver price has been falling. Isn't silver supposed to be insulated somewhat because of its use in industrial applications?


CL: About 50% of silver is used in industrial applications. At the current price, most of the silver miners are not making money. That blows my mind. But silver dropped to a few dollars in late 2008–2009, so I can see that silver could now potentially drop further. Silver will continue to be produced because it is mined mostly as a byproduct of base metals operations. If silver drops to single digits again, it's the buying opportunity of our lifetime.


TGR: Tell me why you're so keen on platinum group metals (PGMs).


CL: It's a very interesting situation. There is very strong physical demand. China has a huge pollution problem. In China, only Beijing has strict car emission standards comparable with those of the U.S. and the European Union. The surrounding provinces don't. So if China is really serious about reducing pollution, which I believe it is, all Chinese provinces will have to upgrade their emission standards. When and if that happens, I'm not sure we have enough PGMs to upgrade the cars.


TGR: You're talking about catalytic converters here, right?


CL: Right. That's where most of the palladium and much of the platinum goes. And the demand will come not just from China. According to the World Health Organization, the world's most polluted city is in India. There is a supply/demand problem looming. Right now, both platinum and palladium are trading at a deficit. With the strike in South Africa, investment will go down. With the troubles in the Russian economy, investment will go down. Production will not keep up with demand for the foreseeable future.


PGM prices have been hit very hard, just like gold. But this is due mostly to fund or ETF selloffs. Some 50% of COMEX's platinum position was sold in September. That tells you a lot of funds are really in trouble. Along with energy going down, I believe a lot of funds cannot survive 2014. Even those that do will see a lot of redemption. It won't be a question of investors wanting to get out; they'll be forced out. I see lots of opportunity ahead. Just as with gold, the end of 2014 and the beginning of 2015 could see a bottom in PGMs.


TGR: The bear market in gold stocks started in April 2011, 31 months ago. Since then, we've heard many times that the bottom is in, but it never is. With the end of year upon us, could we see one last flurry of panic selling?


CL: I think there's a possibility of final selloff to flush out all the weak hands and all the leveraged positions. But it's hard to say. Sometimes bottoms form that way. Sometimes bottoms form without people paying notice. Sometimes we get round bottoms and sometimes V-shaped bottoms. One thing for certain, as I mentioned earlier, I'm spending a lot more time visiting mines and meeting with mining company executives to be ready when the bottom comes.


TGR: Chen, thank you for your time and your insights.


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.


1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher ofThe Gold Report, The Energy Report, The Life Sciences Report and The Mining Report,and provides services to Streetwise Reports as an independent contractor.
2) Chen Lin: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
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