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Palladium Shortages Expose Broken Futures Markets for Precious Metals
Craig Hemke warns of fraud in fractional reserve precious metals markets...
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up Craig Hemke of the TF Metals Report joins me for a fascinating conversation you will not want to miss.
Craig tells me why we all need to pay attention to the white-hot palladium market right now and discusses the massive physical supply shortages there that have a chance to actually break the trading exchanges. He also suggests 2019 is poised to be the best year for gold and silver in nearly a decade. So make sure you stick around for my interview with Craig Hemke, coming up after this week’s market update.
Well, it’s been a wild few days in the markets for stocks, commodities, and precious metals....
In spite of the trading week being shortened by a national day of mourning for former President George H.W. Bush, the S&P 500 experienced one of its widest weekly trading ranges of the year. Prices swung 5% from high to low, with most of that being recorded on the downside. The stock market did manage to avert a major technical breakdown Thursday, closing well above its low point.
Stock market gyrations helped drive some safe-haven inflows into precious metals. For the week, gold shows a 1.9% gain to bring spot prices to $1,246 per ounce. If the gold market can close above $1,250, it will establish a five-month high and could be well on its way to embarking on a major rally.
Turning to silver, the white metal is putting in a 2.8% weekly gain and currently trades at $14.62 an ounce.
The other white metals, platinum and palladium, got hammered on Thursday. The selling brings platinum to a weekly loss of 1.0% and a spot price of $796. Palladium, meanwhile, traded at a record high earlier in the week but has given back a bit of it to trade at $1,224, now good for a 3.2% weekly gain as of this Friday morning recording.
The palladium price actually exceeded the gold price on Wednesday as concerns over palladium shortages prompted aggressive buying by users. The primary source of palladium demand is the automotive industry, which requires either platinum or palladium in catalytic converters. Lately, automakers have favored palladium – a trend reflected in the $400 premium palladium now commands over its sister metal.
Manufacturers now have an incentive to switch to platinum where possible. It will take time for the economic incentives to translate to actual substitution on assembly lines, however. For now, many automakers have no choice but to buy palladium regardless of price.
Today’s guest Craig Hemke has a lot more to say about some of the very interesting developments in the palladium markets and some big ramifications for the other metals, namely gold and silver. So, stay tuned for that.
Precious metals investors, unlike the auto makers, aren’t so constrained. They can buy the metal that offers the best long-term value. There’s a good case to be made for platinum – and possibly an even better case to be made for silver at these levels.
Platinum, like palladium, is heavily tied to automotive demand. The auto industry faces risks from a potential economic downturn, stricter regulations, and trade wars involving tariffs. President Donald Trump’s tariffs on steel and aluminum have hurt some car companies even as he announced this week that China agreed to cut its tariffs on U.S. car imports.
Trump has also moved to replace NAFTA with an alternative trade agreement with Mexico and Canada. It’s one of the many ways the current president has sought to move the U.S. away from the entangling alliances previous presidents championed in the name of global integration. The United States and many European countries are rediscovering national sovereignty and rejecting costly global pacts such as the United Nations Compact for Migration.
Trump’s self-described “America First” nationalism is a direct rebuke to the globalist ideology that had held sway across multiple administrations – ever since the late George Bush called for giving more power to the United Nations and for a “new world order.”
George H.W. Bush: And now we can see a new world coming into view. A world in which there is the very real prospect of a new world order. A new world order can emerge. A world in which nations recognize the shared responsibility for freedom and justice.
A new world order. A world where the rule of law, not the law of the jungle, governs the conduct of nations. When we are successful, and we will be, we had a real chance at this new world order. An order in which a credible United Nations can use its peace keeping role to fulfill the promise and vision of the UN's founders.
What is at stake is more than one small country. It is a big idea. A new world order, where diverse nations are drawn together in common cause to achieve the universal aspirations of mankind.
The New York and Washington, D.C. media openly detest President Trump’s nationalism and used the occasion of President Bush’s passing to feign admiration for the 41st president’s “kinder, gentler” nature. Of course, during his time Bush was the target of vicious media attacks, including accusations of “racism” for favoring tough on crime policies and fake news about him being unaware of how grocery store checkouts work.
The media portrayal of Bush the elder being out of touch – combined with his big government regulations and tax raising schemes -- helped cost him re-election in 1992. Bush himself blamed Ross Perot and Alan Greenspan for his defeat. Third party candidate Perot attracted support from fiscal conservatives over his plans to pay down the national debt. Fed Chairman Greenspan refused to abide Bush’s preference for lower interest rates. But Bush’s decision to go back on his pledge of “no new taxes” may have sealed his fate anyway.
Republicans have since learned that being the party of lower taxes is essential to their electoral success. They haven’t learned how to be the party of lower deficits, however. Neither have Democrats.
Back in 1992, it was still plausible for an outsider like Ross Perot to come in and get control of the national debt. We finally have a political outsider in the White House, but the debt has grown several fold since 1992 to nearly $22 trillion. There is no political will or way to pay it down or even slow its growth.
With trillion dollar deficits looming ahead of the 2020 election, Trump can only hope that voters won’t care because the economy remains superficially strong. But current Fed chair Jay Powell may trigger a recession – or worse – by continuing to hike rates. All eyes will be on the Fed’s next policy meeting, December 18th and 19th.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome in Craig Hemke of the TF Metals Report. Craig runs one of the most highly respected and well-known websites in the entire industry and has been covering the precious metals for a decade now, and he puts out some of the best analysis on banking schemes, the flaws of Keynesian economics, and evidence of manipulation in the gold and silver markets.
Craig, welcome back and thanks for joining us again. How are you my friend?
Craig Hemke: I'm fine, Mike. Thank you for the kind words. I very much appreciate it. It's always a pleasure to visit with you.
Mike Gleason: Yeah, likewise. Well, Craig to start out today, I want to go a little unorthodox here and ask you about palladium. You've been covering developments in that market closely. As we're talking today, we're seeing palladium higher than gold now, and the potential ramifications of what we're seeing in the palladium market could be significant for all metals.
So, if you would, set the stage here and give our listeners a summary of what you see happening there. Lease rates have been exploding higher and that just might be signaling a serious problem for the LBMA. Please explain a little bit about metals leasing and what the dramatic moves in palladium might mean, Craig. And hopefully after you do that, our audience will understand why we're leading off with that topic in this interview.
Craig Hemke: Yeah, that's the significance of it Mike. You've touched upon it. I guess in a sense, I wish I would have started the TF Palladium report back in 2010 because prices have about tripled since then, and it's been a better performer than gold and silver. And I've seen stuff today about people writing about how all of a sudden with palladium spot prices exceeding gold that that's something significant. It's not. That doesn't mean anything, because they're not interchangeable. It's really an apples and oranges thing. What matters in the palladium price is that it's breaking out to new all-time highs, and the circumstances behind this move.
Personal history, back in 2001, palladium ran from $400 up to $1,100 an ounce over the course of about nine months. And it was all in the back of what was clearly a demonstrable supply shortage at the time, primarily in London because the futures market is pretty small in New York. As legend has it, President Yeltsin, who was eager to curry favor with the west ... think of this as just past cold war time, was quick to supply physical palladium to London to be delivered in what was a supply squeeze. It had driven price up that far.
Russia supplies about 40% of the global palladium supply and price then crashed, went back down from $1,100 to $400 over the next nine months. So it was a full roundtrip. Price then came up again to $1,100 about this time last year, and for a while it looked like it’s a clear double top on the chart, but it has since exploded since August. It's gone from $800 now to $1,200 over the last four months.
And behind this move and the significance of all of this for gold and silver investors is this supply squeeze that's clearly there. How can I say that? Two things: One, the lease rates in London that you mentioned ... David Jensen reports that yesterday a one month lease rate for palladium in London was 22%. Let me repeat that, okay? Traditionally it's about zero percent, right? You look at the gold lease rates, silver lease rates are always zero to one percent. If you want to borrow my palladium so that you can deliver it against your short obligation or deliver obligation, I'm not sure I'm going to get it back because it's in such short supply. Therefore, I demand you pay me 22%, okay? That's up from 15% the day before. It's up from 10% last week so that's evidence of the growing shortage.
You can also look at a traditional measure which is backwardation. In futures trading you usually get contango, which means that the spot price is a little bit less than the front month futures, which is less as you go out the board, the price gets higher... that's contango. That's how boards are usually structured. In palladium, at present, it's backwardation. The spot price is about $1,250. The front month futures is about $1,230 and as you go out to this time next year for a ... I guess we'll call it a futures delivery in New York, it's about $1,150 so you have about $100 in backwardation. That's also evidence of supply shortage.
Now, putting this all back together; if this in fact, happening like it did in 2001, I don't think President Putin is going to be as accommodating at this time as President Yeltsin was. If, and this ultimately, now that everybody has this background, this ultimately is why this matters. If the physical palladium market in London begins to fracture and dissolve, and the LBMA palladium market gets exposed for what it is, which is a series of leases and promissory notes and unallocated accounts and all this kind of stuff, then that is going to shed light on the LBMA gold and silver markets, which are similarly a series of leases and fractional reserved, unallocated accounts and the like.
So what my hope is, and why I've paid such attention to this over the last couple of months, is that the world will wake up and go, "Well, hold on. Wait a second. Time out. If the palladium market is structured this way and it just blew up, there's nowhere near the amount of supply of palladium as these paper markets would imply, well holy cow, maybe the gold and silver markets deserve our attention too.”
So, I'm not advising anybody to buy palladium coins and stuff like that. I mean, I'm sure the banks will do everything they can in their power to rig price back down. They'll probably be successful. But the hope with palladium is that it will shine the light ... draw attention to at least, the scam, the fraud of this fractional reserve and paper derivative pricing scheme, and then that'll trickle over into attention in gold and silver.
Mike Gleason: It is interesting that all of the action the palladium markets isn't showing up in platinum. Palladium is in the platinum group of metals and shares many of the same properties. When it comes to use in catalytic converters, which drives a lot of demand for both metals, some argue the two metals are pretty much interchangeable. The implication is that car and truck makers will happily switch to platinum if they can save a few hundred dollars per ounce, but so far there's no indication this is happening. What do you make of the price disconnect between platinum and palladium? Is palladium perhaps the only precious metal that isn't under the thumb of the Bullion Bank cartel?
Craig Hemke: I wouldn't say that, Mike. I just think it's solely focused on the dynamics of the scam of the palladium market, which again is the same scam of the platinum market, which is the same scam of the silver market and the gold market. It's that the palladium market is fractured. That's what the 20 plus percent lease rates are telling you. That's the backwardation of the board is telling you. They've set price. Price is determined and we, as a world, allow price to be determined by the trading of derivative contracts which have nothing to do with the actual supply of the physical metal. I mean, that's why the gold-silver ratio is 80 to 1. "What do you think of the gold/silver ratio?" I think it implies that there's far more silver derivatives than there are gold derivatives, at least on a historical basic because if we price these things based off of these derivatives which the banks create and then take away at a moment's notice.
They feed in supply demand of the derivative to set the price of the physical piece of metal. So this movement in palladium is specific to palladium and the physical metal not being there to settle current demands that are made by this paper system. That's still how you get the 22% lease rates. Can't wait to see what happens tomorrow, Mike, and next week. Again, what you've seen this week is that price rallies during the European session and the Asia session, and then gets blasted backward each of the last four days on the COMEX, where it's just paper trading. The banks can create paper contracts, and sell 'em short and push the price back down just like they do in gold and silver.
But at some point, that becomes a losing proposition. We were headed that way in 2011 in silver. I mean, we probably don't need to go through that history lesson. What happened? You got five margin rate hikes in nine days. You got the massive rate on May 1, 2011. JPMorgan, which had a huge short position then, but no vault magically was allowed to create a new vault, a silver vault, and over the course of a couple of weeks and now they've got 150 million ounces in their vault.
All those steps were taken to get the silver price back under control so that wouldn't break this paper slash physical silver market. They may take the same steps in play. Maybe they'll move to a liquidation only event on the COMEX like they did to the Hunt Brothers in an attempt. This is a physically driven thing which it appears to be out of London, they're taking some major risks. They being the banks, if they're going to try to rig price lower through the derivatives in New York.
Mike Gleason: What kind of world would it be for metals investors if we actually had the physical metal setting as the price-setting mechanism instead of the paper derivative market? Gosh, that would be quite a pleasant change.
2018 has been another difficult year in the gold and silver markets. The Fed has been hiking interest rates and until recently, at least, pretty much getting away with it. The dollar has moved higher. It has been risk-on on Wall Street for much of the year and the sentiment around precious metals has been lousy, but there is some reason for hope. It looks like the Fed's free ride may be over, or at least coming to an end before much longer. Stock prices are taking a beating here recently, and things are getting squirrely in the bond markets.
Now you think metals investors may have some good reason to smile over the next few months. What are you expecting over the next few quarters, Craig?
Craig Hemke: Well, I was excited at the end of 2015 when we put in those lows, that were the bear market lows. Everybody thought $800 gold and $8 silver was coming, and I planted my leg and I said, "No, this looks like we're going to rally." We rallied far beyond what I thought we were going to get. We got 30% in gold and 50% in silver. And then the clamps came down and Trump was elected and all the sudden, the narrative was shoved down our throats about how the economy was going to soar and all that kind of stuff, and we've not had much happen ever since.
I would point out though, that that year, 2015, was just one of the last four that has seen prices rally out of the December FOMC, the middle of the month, tax loss selling behind us, all that kind of stuff, rallying to the end of the year and then into the first quarter. And I have little doubt that that's what's going to happen here this year as well.
Then, as you mentioned, where everybody seems to think that next year is this easy, predictable thing and the Fed's going to hike rates three or four times, the economy's going to grow. "Oh no, there's no recession until 2020" and that kind of stuff. That's garbage.
You mentioned the bond market. The yield curve is inverting. Got all the way down to less than 10 basis points between a two year note and a 10 year note back on Tuesday. Yield curve inversion always precedes recession, and then you've got effects of the tariffs. You've got the effects of ... I mean there's going to be 101 different investigations of Trump next year from the Democrat House. All of that is going to impact consumer confidence. The economy is going to slow. By mid-year, the Fed will certainly have halted ... they're going to hike in December. Who knows if they'll try again in March, but there ain't going to be four hikes next year.
By the end of the year next year, we're going to be talking about a resumption of QE because of all of the stuff that I'm talking about. You know, and another thing no one's talking about is maybe a lack of a Brexit deal and maybe a second referendum. And what if the Brits vote next time that they don't want Brexit? Well, then the euro's going to soar, and the euro makes up 60% of the dollar index. That means the dollar is going to crash. Well, nobody's factoring that in. All I hear is from dollar bulls is about how it's going above 100 because "King Dollar" and all that garbage, so I think a lot of the forces are aligning, all the way down to the CoT (Commitment of Traders) positioning and the managed money that's still heavily net short, both metals.
All the forces are aligning for a big first quarter, that I think will carry on through the year. And frankly, again, maybe I'll be dead wrong, but I think 2019 is going to the best year for gold, and silver too, since 2010 because of a lot of the same situation that prevailed in 2010; slow economy, pickup of QE, all that kind of stuff. That's all coming back next year and I think investor sentiment will return. Flows of funds will return. The shares are going to do great. It's just a matter of just kind of navigating our way through these next couple of weeks before this becomes more apparent to everybody.
Mike Gleason: Over the years, you've taken some abuse for calling out the chronic cheating and manipulation going on in the futures markets. We'd like to think, given all the evidence now piling up, that the argument over price rigging is now settled. The bullion banks have been running a crooked casino and swindling metals investors for years, if not decades.
John Edmonds, a former JPMorgan trader, has agreed to cooperate and has implicated other people both inside and outside the bank. The FBI and the Department of Justice seemed to be doing what the regulators, and the CFTC in particular, failed to do for so long. They are prosecuting a mass of fraud. What do you make of the DOJ's involvement and the recent developments? Will the bullion banks finally be held to account here?
Craig Hemke: I wouldn't hold my breath. I think it's interesting that the Department of Justice is involved. I think everyone should've read, or should read the update on that case, because even in the press releases from the Department of Justice, they went out of their way to not name JPMorgan. People had to research this Edmonds guy and figure out who he worked for on their own. The Department of Justice just wanted to say "a US bank" was all they would say.
This guy then went on to say what he did was just one instance, one guy, but he had the full support of all of his superiors. And then I also read that, "Don't worry, he's just a low-level guy." He was a vice president. Anybody that's ever worked for a multinational major corporation knows that once you make the level of vice president, you're kind of a made man, okay? So this wasn't just some doofus in a cubicle, right?
Anyway, all that said, the only people that deny this or try to spin it in a certain way as a one-off are all people who have a vested interest in protecting their own golden spoons, if you will. They all have their skin in the game. They sell newsletters where they purport that the markets are free and fair and thus you can count it in waves of C and 3 and all that kind of garbage, and if they were to admit that a certain market was manipulated, well, then their customers are going to go, "Well, wait a second. Why am I paying you to give me this information if it's all just manipulated?"
So they'll fight until their dying day that markets aren't manipulated, when anybody with eyes in their head can see that they are. And it's not just gold and silver. If I can just spin off to the stock market in a second. Look, I'm an observer. I watch this stuff every day, and not very many people get to do that. They have their own skin in the game, they're trying to trade it and all that kind of stuff and that gives them biases.
I just observe, and I can tell you from my observation of the last eight or ten years, that the stock market is almost entirely manipulated. "How can that be? It's trillions and trillions of dollars." Well, to manipulate the market, you don't have to buy trillions of dollars of stocks. You just have to get the Algos, the hedge fund machines that control trillions of dollars to do the lifting for you, and how do you do that?
90% of the stock market volume each day is high-frequency trading computers run these hedge fund machines. If you can move the inputs, that these machines use to make their buy/sell decisions of S&P futures, then you can move the market, and what are the two key inputs? You go long the dollar-yen, and you short the VIX. Anybody can pull these up on a daily basis, watch them all minute by minute, tick by tick. You can see the clear footprints, the clear fingerprints, whether it's the Federal Reserve Bank in New York and their massive trading desk, or whether it's the primary dealers, they go in there. They move one or two of those indicators, or both. The machines then respond. Magically, the decline stops and up we go. It's not some C way B of sub-sector X, whatever, kind of Elliot Wave nonsense. It's direct manipulation to create a result.
It's not, again, not just in the gold and silver markets. It's in the stock market. QE is utter manipulation of the bond market and interest rates. Central Banks globally intervene and manipulate in Forex, and so for these jokers with their newsletters to sit there and say, "No, gold and silver are these pristine sacrosanct things that aren't manipulated, they're comical with their views. It's asinine. So, anyway, I'm sorry, probably didn't like the answer, but I've had too much coffee today as you can tell.
Mike Gleason: Well, as we begin to wrap up here, Craig, give us any final thoughts here. Maybe some of the data points or market events that you're going to be looking at that will be an indication that either things are going to happen as you've laid them out in 2019, or perhaps something that could derail your theory that next year will be a banner year for the metals. Touch on that if you would as we begin to close.
Craig Hemke: Well, I think what's priced in, Mike, is this again, this is just continuation of what has happened this year. Again, I don't think that's going to happen at all. I think the first thing we got to get through is this FOMC meeting in two weeks. There's going to be a rate hike, but people are really going to parse the changes to the statement that we call the Fed lines and see if that's any indicator of what's going to happen next.
There is no way the Fed's going to hike three or four times next year because already, the ten year note is where it was back in February and the Fed has hiked three times since, so they've flattened the yield curve by 75 basis points. They're pushing on a string to get long rates higher. It's just not going to happen. There's too much cash looking for a home.
That's going to be the big thing, is the economy is going to begin to visibly slow. Confidence is going to crash; all these investigations of Trump. The dollar is going to reverse and trend lower, and all these things are going to create a really good, positive ... I don't want to call it perfect storm, but a great environment even for these digital derivative gold and silver on the COMEX that sets price.
I guess the one fly in the ointment that we're going to have to watch closely, and I would just leave everybody with this: the key driver of that COMEX price this year has been the Chinese yuan and its relationship versus the dollar. If the yuan strengthens, gold goes up. If the yuan weakens, gold goes down. It has been prevalent all year long. It has been almost tick-for-tick since April. You can see it this week and the reaction to the discussions over the weekend at the G-20. They're moving almost tick-for-tick.
China has devalued the yuan in the face of the trade war, and that has then pushed gold down. I mean, we don't have to go into why and all that kind of stuff, but it's clearly happening, and so what we're going to need though at some point next year is a disconnect of those two, or a cessation of the trade war that allows the yuan to appreciate versus the dollar. And I think that's coming.
I think Trump, and you saw first this weekend with a little bit of capitulation, with the whatever 90 agreements they have, but Trump's going to look around. He's going to see the faltering economy. He's going to see the falling stock market. There ain't going to be these 25% tariffs. He's going to settle for much more generous terms than he's currently offering with the Chinese.
That's going to allow the yuan to appreciate, and even if the two don't de-couple, that should also benefit higher gold prices too. So, that would be the thing though. If somehow that doesn't happen, and the yuan continues to devalue and breaks down through seven-to-one versus the dollar, that's going to keep pressure on gold regardless of all the other stuff that we've talked about, so hopefully all that comes together and like I said, we have a fantastic year next year. It's certainly all set up to have it play out that way.
Mike Gleason: Yeah, it seems like there could be a lot of fireworks coming together at a head at one time and going to be interesting to watch.
Well, great insights as usual, Craig. It's always good to hear from you and we greatly appreciate your time today. Now, before we sign off, please tell everyone about the TF Metals Report and what it is that they'll find if they visit your site.
Craig Hemke: Hey, Mike, thank you. I think it's tremendous value. The subscription is $12 a month so about 40 cents a day. It's two things: it's my analysis every day that I think people use to, I guess, help them figure out when's an opportune time to buy and sell, add to their physical stacks of metal. If I can save you a few bucks on price through analysis, telling you to wait or telling you to go, versus what I'm seeing, then that kind of makes this thing pay for itself. But it's also an unbelievably great community of people that are like-minded, realize we're all in the same boat together, and everybody's out there helping each other to prepare for all of this stuff that's assuredly coming; the end of the great Keynesian experiment, as we call it.
So, I encourage everybody to check out, it's just TFMetalsReport.com. It's a site like no other. That's the feedback I get all the time, and I'm really proud of it, and I'd encourage people to check it out.
Mike Gleason: Yeah, we would encourage people too. We follow it very closely here. Craig, as you've just heard, has a fantastic handle on the markets, especially when it comes to metals and the things that drive it, you will do yourself a favor if you check that out.
Well, excellent. Thanks very much, Craig. I hope you have great holiday season and a wonderful new year. I'll look forward to our next conversation as we discuss how this is all playing out. We agree that 2019 is shaping up to be a very interesting year. Until then, take care and thanks as always.
Craig Hemke: Thanks, Mike. It's always a pleasure.
Mike Gleason: Well, 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 everyone to check that out so you can get some of the very best commentary on the metals markets that you can find anywhere.
And be sure to check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend, everybody.