Exclusive from Craig Hemke of TFMetalsReport.com: “Get Ready for a Consequential Year”

Mike Gleason: It is my privilege now to welcome in Craig Hemke of TF Metals Report. Craig runs one of the most highly respected and well known blogs in our industry and has been covering the precious metals for close to a decade now and provides some of the very best analysis on banking schemes, the flaws of Keynesian economics, and the massive manipulation taking place in the gold and silver markets. He puts out all of his fantastic commentary under the name Turd Ferguson, which, as you would guess, means he likes to keep things as light as possible while providing this top notch analysis.

Craig, it's great to have you on with us and thank you for joining us today. Welcome!

Craig Hemke: Mike, thank you so much. The pleasure is mine. It's great to have a chance to visit with you.

Mike Gleason: Well, Craig, you follow the precious metals markets very closely and you have your finger on the pulse of the average metals investors as so many of them frequent your website. What's the general feeling of your audience about where things stand as we enter the new year? Are they bullish, bearish, worn out, or what?

Craig Hemke:The two or three of us left that still follow the metals, we're all pretty excited. I'm just joking. Yeah, it has been a really crazy couple of years and I think it really goes back to the initiation of what we now call QE3, which started in October of 2012 and that was a time gold was $1,700-$1,800 an ounce and we're going to have a trillion dollars of new QE and everybody thought, "Well, this seems pretty easy," right? All through QE1 and QE2 the metals went higher and higher as did the stock market and the Fed balance sheet and everything else.

Then you had this odd disconnect that took place. The Fed balance sheet grew. The stock market continued to go up and gold went straight down by 30-35%. It has been a very challenging, if not counter-intuitive, three years. I really thought perhaps we would turn the corner next year but price has continually been pushed or managed lower it seems and now we're at a point where, well, we'll just see what 2016 brings. We've been calling it, at TF Metals Report, a year of consequence, a year that boy, just about anything that you try to predict is literally unpredictable. We're already off to such a crazy start with the stock market being down about 4% year to date and gold being up 4% year to date. I'm not sure if that'll continue 1% or day. It wouldn't break many hearts if it did but boy, to try to predict what's going to happen and how it's all going to happen this year is going to be challenging.

In the end, I think most of us that are still left in the sector accumulating gold and silver feel pretty confident as to why, we know why we were buying this stuff in the first place, and we know the conditions that led us to be gold bugs, if you want to call us all that. We know the conditions that led us to feel that way in the first place are still there. I mean, nothing's changed so we'll just continue to take advantage of these very low prices that aren't really economically discovered and we'll just continue to stack and wait for things to play out. A lot of it'll probably beginning here this year.

Mike Gleason: A lot of your coverage there at TF Metals centers on the futures markets and you examine what's happening there probably as closely as anyone so I want to ask you about some interesting developments there. In recent weeks we've seen registered inventory of gold in particular plummeting so before we go any further can you talk about the eligible and registered categories of inventory and then give us your thoughts on what's happening to the stock of physical bars in vaults?

Craig Hemke: I'd be happy to. You have to look at it, the data that comes out of , one you've got to look at it with some skepticism because back in June of 2013 suddenly the CME started putting a disclaimer on their daily report saying, "Well, you know, take it for what it's worth," all the lawyerly stuff disclaiming an responsibility for the accuracy of the information so first of all you've kind of got to take it with a grain of salt. Second, the only way you can really value that information or assign value to it is to look at it as an anecdotal data point. You can't just simply say, there's X-amount of ounces of registered gold, there's X-amount of ounces of eligible so therefore that means that the is going to default. They're just simply two categories that the banks use to classify the gold that they allegedly have in their vaults or that act as the depositories. Really they can use just simple journal entries to move gold back and forth from one category to the other.

So while it's noteworthy that for about a ninety day period in late 2015 the registered category, that gold which is, I guess, loosely defined as being ready to delivered or able to be delivered for the delivery process it supposedly backs up the paper derivative price, but that gold got down to a level that we'd never seen before. It used to be 5 million ounces a few years back. Even early in 2015 it was a million ounces but it went all the way down to 120,000 ounces for about ninety days in the fall of last year and stayed there. Again, it doesn't really mean a lot taken specifically because again they can journal, these banks can simply journal gold from one category to another. We've seen that happen in December. We're back up to 270,000 ounces or something like that. So because that gold can be journaled back and forth, the specific number itself, of registered ounces doesn't mean a lot.

What you need to look at it though as, is an anecdotal data point of what might be just another sign of physical tightness. Why did the registered gold go from a million ounces down to 100,000 and why did it stay there for so long? If you look at that and take that in a combined big picture about what's happened to the GLD and where did that gold go; the stories we get out of London about the vaults being emptied basically of all of the gold flowing from West to East; the constant import numbers – we just got another Chinese import number today of nearly 20 metric tons for the month of December; the gold that's flowing into India; the gold that's going into Russia. Where is it all coming from? Is there instead a physical tightness in the West? I think there is.

I think these anecdotal data points such as the inventory's kind of fall in line with that analysis. I think that's key to understanding why the price disconnected from the stock market and from the Fed balance sheet in 2012, why it has continued to go down all the way through the end of 2015, and what might be the key to breaking that trend going forward. I hope I answered your question. I kind of gave you a long winded answer to all of that. There is some significance to it but it's not, those numbers aren't something that should really set your hair on fire, meaning that there's some kind of imminent default there.

Mike Gleason: Furthering the point here, you recently wrote about the motives of paper, of the paper trading market and I want to read an excerpt from a recent article that you did and then get your comments. You wrote:

"The bullion banks control these markets and the speculators are their play things. Spec money piles into long positions and the banks issue the shorts on the other side. Prices then crashed, inducing Spec liquidation and shorting while the banks buy to cover their shorts and add longs. Once this cycle is complete, it begins again. Wash, rinse, repeat."

Expand on this if you would and then also tell us if things appear to be any different right now than maybe they have been in the past.

Craig Hemke: You got about a half hour or so for this one? Yeah, that's a very good question but there's a lot that goes to it. Let me just say that on the , you're basically just trading paper derivative contracts for a synthetic, alchemized, if that's a word, gold. It's not really gold, it's just paper futures contracts. There's really no physical delivery. December, the month of December was the latest what we call delivery month where you should be able to take your paper contract and then stand for delivery. Each contract represents a hundred ounces of gold, but what we found is there were only about 2,000 contracts that were delivered and about 98% of that 201,000 ounces of gold, about 98% of it was all claimed by the proprietary account at JP Morgan. Then we also never saw any gold move into JP Morgan's vault. They just simply took paper possession of some warrants and some warehouse receipts and other depositories.

So what I'm getting at is there's no real physical price discovery on the Exchange in New York, but yet that is the price that is used for physical transactions. It doesn't make any sense. The only price that's been discovered in this paper trading is the value of the paper derivatives, really. You're not really finding a price of a physical gold because no physical gold is exchanging hands on that exchange. You see what I mean? So instead what the COMEX has become is this playground for the banks because since they don't actually have to put up any physical gold to short the metal, they just simply create short contracts. They create new paper contracts from thin air, from whole cloth, whenever there is speculator demand for gold exposure.

So what we see is this repeating cycle and we get data from the CFTC, the Commodity Futures Trading Commission. One of the pieces of data is called a Commitment of Traders Report, which tells us every week kind of the summary positions of the speculators on one side and then what are called the commercials, which includes the market making banks on the other. And what we're able to see is on every rally the speculators are covering their short positions, which is a buy transaction and then buying more long positions. We're seeing it today. We're seeing it this week with gold up as substantial as it is. What's happening is the speculators are buying.

Taking the other side of that transaction are these commercials, these banks, which are either selling contracts that they already have or they're creating brand new contracts from whole cloth and selling short to meet all this spec buying. What happens, and the most recent example was back in October, price shot higher, got up to about $1,180 or so, price was capped there with aggressive supply of new short contracts from the banks, right at the 200-day moving average, which is a key technical indicator. If the price had surged through there it would have brought in even more paper buying from the speculating machines that see this breach of this key technical indicator and buy even more. Price is capped at that level.

Eventually some news is trotted out and that was the FOMC meeting of late October that was used to begin the move down and eventually, again and we can monitor this through the CFTC reports, all of that speculative buying interest gets flushed back out. All of that selling from the specs is met with buying from the banks, buying back all of those short positions that they just recently issued, the total open interest contracts, and the whole market is washed out again and it was washed out again by December.

Recognizing this at TF Metals, we started telling everybody, "Hey, let's look for some sideways to up action at the end of the year and then let's look for a rally as the cycle begins again in January," and low and behold that's exactly what's happening. What people need to understand is this is a sham illusion of a pricing structure. Again, the only price that's being discovered is the value of these paper derivatives that the computers trade back and forth.

One day soon we'll actually price the gold and silver off of the actual price discovered by the exchange of the physical metal itself. It may not happen this year. It may not happen next year but it's coming. There are changes afoot and when it does price isn't going to be $1,100 an ounce for gold. That's all I can tell you.

Mike Gleason: Certainly we have a lot of supply destruction here. Mines are having a very difficult go of it at prices at these levels so I guess part of the end game possibility here, if we talk about that, I mean we see a couple of possibilities ourselves, either prices rising dramatically to entice more sellers and increase the supply or delivery defaults maybe. Maybe even a collapse of western exchanges entirely as all the trust in paper contracts for metal vanishes. So what are you expecting?

Craig Hemke:Here's where I'll just kind of stick my neck out and speculate. What I've been contending now for, we'll go all the way back to 2013, I think the world, the gold market really started to break in 2012. We have this incessant, non-stop demand from the East and that demand has to be met with some kind of supply. Well, where did they get the supply? Well, again the GLD, the Exchange Traded Fund is down about 700 metric tons from its peak. There are all these anecdotal stories about the vaults of London being empty. We get that actual hard data showing the export numbers from the U.S. and from the U.K., that gold flowing from us into Switzerland where it's re-refined into kilo bars and then exported from Switzerland into China. There's an actual factual paper trail that you can follow to see this all on a monthly basis.

So I think what's been key and why the down trend in price has been enforced for the last three years is these bullion banks, which are on the hook to supply this physical metal recognize that they're in a bit of a jam. They're meeting all of this demand with flow from the West to the East and the key thing that they cannot allow is a return to western investment demand. We had huge investment demand. We had big demand for gold. That was all the rage back in 2010 and 2011 but now we're at the point where nobody cares anymore, because in the West people only want to buy stuff that goes up. If it's going down, I don't want none of that. I just want to buy stuff that's going up.

That's not how it works in the East. People buy stuff when it's going down and that's all part of why there's such insatiable demand there. Well what will happen to these bullion banks when price finally does reverse, when we do start making a series of higher highs rather than lower lows and all of a sudden people do want gold again, not only just physical gold but they start coming back to things like the GLD and they start coming back to the, even the COMEX to buy paper contracts? Where are the banks going to get the 700 metric tons to put back into the GLD should investors rush back into that thing?

Mike Gleason: Yeah, there's strong hands in China. I don't see them giving it up very willingly.

Craig Hemke:Exactly, it's gone for good. I remember writing an article called Gone for Good back in the summer of 2012. It's not coming back and it's certainly not coming back in the form of 400-ounce London bars, which is the form in which it was originally leased out by the bank that now the Central Banks still claim to hold as an asset on their books. Look, this is a real jam that the amount of paper claims, the amount of unallocated accounts, people that think they own gold when really they own an exposure to gold.

Boy, when the music stops and people finally come to collect their gold that they think they own and they come to find out that they own an unallocated account, they own shares in the GLD, which are just paper shares, they own an account like they thought they held, an MF Global where warehouse receipts just disappeared with the rest of your cash. Well, when the music does finally stop, and it's going to, and controlling western demand by suppressing price is a key to keeping the music playing but when the music finally does stop, it's going to be a fiasco of the first degree. As I said before, the true price of gold is not- you're not going to be finding anybody that's going to hand you gold for 1,100 Federal Reserve notes. I can tell you that. It's going to be a little bit higher.

Mike Gleason: You sort of probably answered this question in a round-about way in previous answers but I'll ask it here anyway. Many anti-gold people say that the gold bug's claims that the system will eventually break under this massive supply-demand imbalance causing prices to shoot higher are just simply false. It's certainly true to point out that gold bugs have been predicting some sort of major blow up for years but importantly prices are way higher than they were fifteen years ago, but where the gold bugs may have been wrong is that there hasn't been that snap or break that they've been predicting. So if prices are artificially suppressed and I'd say that we both agree that they are, will fundamentals become relevant at any point because many folks are starting to feel that suppressed prices that you just spoke about will simply go on forever. What is your response to that Craig?

Craig Hemke: Yeah, I guess it's conceivable they could. That's always been the concern that these banks can keep printing the paper contracts backed up by the Fed for as long as they want. But I do think in the end these stresses that have been accumulating... yeah the system didn't end in 2010, it didn't end in 2011 – and what I mean by the system, this fractional reserve bullion banking system... but that doesn't mean that the stresses that led us all to wonder about that five years ago have gone away or have not been there. They have simply accumulated and this gold has continued to flow from West to East. Now, will it be enough to finally fracture the system and cause that music to stop, as I said earlier, next week, next month, this year, whatever? I don't know but I am entirely comfortable and confident that it is going to happen at some point.

Whether that means... in April the Chinese are going to start having their own daily price fix that's going to be denominated in Yuan. We've been waiting for that for a couple of years too and it's finally, I guess coming, according to a Reuters story this week, coming in April. Little things like that continue to chip away at the power that these banks hold in New York and London to set price through the synthetic paper derivative. There are new physical based exchanges that are also coming online here this year. All of these things are accumulating to move the price discovery from a paper derivative price discovery to an actual physical price discovery.

I guess to answer your question, I should also throw out, because you mentioned the fundamentals of the miners earlier too, because you know, supply and demand, there's a reason why you learn that in Econ 101. That's a real thing. These are laws of economics, not just like guidelines or principals. My friend, Andy Hoffman, called it the economic mother nature. You can suspend it for a while, you know? Theoretical physics tells you, you can suspend a lot of things for a while but in the end there's a snap back to reality. That end is coming. Again I hate to keep preaching patience but I can't dictate the time and place. I just know that eventually we're all going to be proven correct. About that I have no doubt.

Mike Gleason: You certainly do have to think that it has an exhaustion point at some point in the future here; just a matter of when. Now, you spoke earlier in the interview here about the consequential year of 2016. Now, as we begin to close here, give us your thoughts on why you believe it will be a consequential year and then also how you see things unfolding in the metals after the four plus years of very tough sliding for gold and silver bulls and not just the metals but stocks, bonds, the dollar, et cetera. How do you see 2016 playing out?

Craig Hemke: Well, first and foremost it's an election year here in the U.S. This year, even though I was only two years old in 1968, I kind of like to study history, it reminds me a lot of 1968 where we had political assassinations. I think the Tet Offensive was in 1968. There were all kinds of bad things that happened in 1968. I kind of have that feeling again. We're already seeing this whole global currency war rear its ugly head again with the Chinese devaluation of the Yuan. That happened back in August. It's happening again now. That's going to be a theme all year long and that puts pressure across all global markets.

We started to write about, back in August even before that first breakdown. At TF Metals Report we started writing about what we called the death candle for the stock market and that is a, if you look at a twenty five year or longer monthly chart of the S&P, you can see that the last two stock market bull markets, late 90s and in the middle 2000s they all ended with a big, trend breaking, ugly month. That month was December of 2000. It was also in January, 2008. Well, that month also was August of 2015 and the pattern in the S&P, in the fall of this year, directly followed what we also saw in early 2001 and early 2008, following those big, ugly down months. Here we are rolling over again.

Boy, the stage looks set for a really ugly stock market decline in 2016. Here you throw on another one of these 40% drops in the S&P, which would be financially damaging to so many people that are saving for retirement and such, you put that on with all the other calamitous geopolitical stuff, and the election year, and the fact that a lot of our problems from 2008 have never been solved, they've just been simply kicked down the road, I just see this year as everything coming to a head. Whether that will be enough to finally break the down trend in price that's been enforced for the reason discussed, we'll see. But again it doesn't change my outlook that I feel pretty comfortable continuing to stack physical gold and silver on a regular basis in preparation for what's going to be a really interesting year.

Mike Gleason: Certainly in 2008 we had metals maybe in more of a position of strength than they are now after four tough years. They seem to be quite undervalued so if we a big massive liquidation of all assets led by an equities market decline, it would be interesting to see how precious metals react. Certainly they got taken down with them in late 2008 but it could be a different set up this time. Maybe it acts as a safe haven.

Craig Hemke: The world's a totally different place too. We talk a lot about it. I'm sure folks on your side have talked as well about what's the next financial paradigm? What's it going to be? What's going to be the next reserve currency, if there is one? You mentioned earlier about people that ridicule us because things haven't changed yet. I call those folks “status quotients” because a lot of folks can't really see past the end of their nose. They can't even begin to imagine a world where tomorrow isn't just like yesterday. But you know, there's hardly anybody left walking this planet that was alive when the U.S. dollar wasn't the reserve currency of the world. You've got to go back to 1945, right? There are not a lot of people left that can remember what it was like in the 20s and 30s when the dollar wasn't the reserve currency.

It hasn't been the reserve currency for thousands of years, right? This is a transient state. The U.S. has assumed that metal now for seventy years. It's not going to go on forever but that's a tough story to sell. If you're out there trying to collect your management fees and trying to raise your client base, that kind of thing, that's not one that appeals to folks so that you can go collect your high net worth clients and make more commissions. There's this, I don't know, people try to justify it to themselves to just put out the story, "Oh, yeah, everything is fine. Nothing's ever going to change. Everything's just great." So thus, those of us that do have a more realistic approach, that accept the idea that things are going to be changing, we're often marginalized, and ridiculed, and accused of wearing tinfoil hats, and the like.

Look, tomorrow's not going to be like yesterday. A time is coming where other countries, which were not prepared to offer an alternative in 2008, they have spent the last seven or eight years working on the foundation of an alternative system. Look at the Asia Infrastructure Investment Bank, that type of thing. The world is changing. You have to be prepared for it. You have to remain aware of the changes that are going on around you and again, one of the best ways you can protect yourself financially is the acquisition of physical precious metal, both gold and silver. Gosh, folks should be visiting your site, Money Metals Exchange, on a regular basis and making sure that they're adding some. No doubt about it.

Mike Gleason: Well, very good points. Wonderful insights, Craig. I've really enjoyed talking to you and I hope we can do this again, perhaps regularly. We really appreciate your time. Before we let you go, tell our listeners about the TF Metals Reports and what they'll find if they visit your site.

Craig Hemke: Well, thank you. It's a wonderful site and the magic of it is not what I do. I mean, I've got a subscription service where we talk and anticipate prices, I think pretty well, on a daily basis. We've got podcasts, daily updates. We do webinars, things like that and it's a whopping $10 a month so we're not going to break the bank of anybody if they want to subscribe but the site itself is free. I've got to tell you that the key drawing point is everybody else on the site, the information that the users of the site freely and readily provide, all these different links, and all the different perspectives from all around the internet. So the site itself is valuable just to read, just to read what other people put on there. That's what TF Metals Report has always been about. That's what it continues to be about but if you want to take it one step further and get a little deeper in the weeds, well then we also have this Turds Vault, we call it, subscription service for $10 a month. I just encourage everybody to check it out, again, TFMetalsReport.com.

Mike Gleason: Well, excellent stuff once again and thanks, Craig. I certainly hope you enjoy your weekend and look forward to catching up with you down the road.

Craig Hemke: Mike, thanks. It's a pleasure, a real honor. Appreciate it, give my best to everybody there.

Mike Gleason: Will do and that will do it for this week. Thanks again to Craig Hemke. The site is TFMetalsReport.com, definitely a fantastic source for all things precious metals and a whole lot more. We urge people to check that out, TFMetalsReport.com.