For over a decade, mining companies have relied on a rising gold price to reward their decisions, regardless of whether they were good decisions. Those days are over, and Chen Lin, author of the What is Chen Buying? What is Chen Selling? newsletter, says that investors must embrace companies that can grow their balance sheets even with gold as low as $1,000/ounce. Companies that can generate cash flow and acquire assets at fire sale prices today will likely be the winners in the next wave. In this interview with The Gold Report, Lin identifies a handful of producers that meet this threshold and one explorer well positioned to join their ranks.
The Gold Report: You told The Gold Report in June that you were still bullish on gold "in the long run." Are you still bullish? And how soon is the long run?
Chen Lin: Gold may continue to correct in 2014 and maybe even longer. There is a chance it will hit $1,000/ounce ($1,000/oz). However, inflation will pick up as the result of all the money printing by the central banks. That's when gold's run will really begin.
TGR: You've said that the price of gold is being controlled by the "paper market on Wall Street." Could you elaborate on that?
CL: You can use very little money down to buy gold using the future markets. This leverage is guaranteed by the biggest financial institutions in the United States and the world. In turn, those financial institutions are guaranteed by taxpayers. So the gold price has really been controlled by the paper-market traders. But this could change.
TGR: Isn't gold supposed to be a real thing that cannot be duplicated endlessly?
CL: There is a difference between physical gold and paper gold. But traders see gold as no different from other stocks. There are a lot of things going on we won't know until later.
Right now, China is the biggest gold bullion buyer. And the gold price will probably peak around the Chinese New Year, which is at the end of January. How much further it will bounce from there, it's hard to say.
TGR: Are you worried about China's future?
CL: I'm very concerned. The housing bubble is showing signs of bursting. A lot of empty apartments have been built and are still being built. The strain on the Chinese banking system is very high. In the past few months, most of the banks have not been able to issue mortgages because they don't have the money to lend.
TGR: I've seen it reported that there is far more quantitative easing in China than anywhere else, most of it unofficial.
CL: China's central bank is not very transparent. At least with Ben Bernanke we know how much money the Federal Reserve is creating. In China, this is a state secret. But the money printing in China is enormous, really massive. The Chinese private investor is right to buy physical gold, just in case something blows up.
My concern is that if China really runs into some trouble, the gold price will get hit because China is the largest gold buyer. We saw this during the Asia crisis of 1997–1998. Back then, people were selling gold, silver and even kidneys, believe it or not, to survive.
TGR: How much of the current woes of the precious metal equities can be blamed on low prices and how much on mismanagement?
CL: Bad management teams deserve a lot of the blame. They pay themselves a lot of money. They live lavishly. Most are overaggressive. They buy properties at the top of the market, and they raise money at the bottom. They constantly issue more shares, which kills investor confidence.
But the brokers are guilty, too. Every day they try to talk management into raising capital because they get commissions. And if management doesn't issue shares, it usually get less coverage. That's the link. It's as if miners are paying commissions for coverage.