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Coming Interest Rate Cuts Expected to Drive Precious Metals Higher
Craig Hemke: Palladium Blowup Could Expose Scam of Gold & Silver Futures
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear a tremendous interview with Craig Hemke of the TF Metals Report. Craig weighs in again and offers a concise and clear explanation on what’s been happening in the broken and rigged silver futures markets. And also tells us why he sees 2019 being a similar setup to what we saw in gold and silver back in 2010 and 2011 when the metals went on an historic run. Don’t miss a fantastic interview with Craig Hemke, coming up after this week’s market update.
Markets got roiled this week on some downbeat economic reports and a surge in the U.S. dollar.
The Dollar Index broke out to a 21-month high on Thursday after the European Central Bank came out swinging with more stimulus measures. The ECB indicated it intends to leave ultra-low interest rates in place at least through early 2020. That coupled with bleak new forecasts for European economic growth helped drag down the euro and give life to the dollar on foreign exchange markets.
Dollar strength is usually negative for precious metals, and this week was no exception, at least until today. With a bit of a bump here on Friday gold now shows a slight weekly gain of 0.3% to bring spot prices to $1,298 per ounce. Similar story in silver, which seems to have found a temporary bottom perhaps and is now moving off of it. The white metal currently comes in at $15.40 an ounce, up 0.8% now on the week. Platinum is lower since last Friday by 5.2% to trade at $818. And white-hot palladium is succumbing to selling pressure – down 2.2% this week to trade at $1,515 per ounce as of this Friday morning recording.
For the near term, metals markets appear vulnerable to further selling if the dollar breakout holds. So the question is: How high can the Dollar Index go?
The dollar closed Thursday at 97.63 on the Index. If it continues to rally, then the key level to watch would be 100. The dollar rally of 2015 stalled twice right at 100.
The Donald Trump administration would be none too pleased to see the dollar make a run through the 100 level. President Trump himself has repeatedly expressed his displeasure with the Federal Reserve’s interest rate hikes.
Even though the Fed paused on hiking in January, the U.S. rates are still significantly higher than in Europe and elsewhere in the developed world. The newly dovish posture of the European Central Bank had the same effect in the foreign exchange markets as a rate hike in the U.S.
More bad news for President Trump – on Wednesday, the Commerce Department reported that the United States posted a record $621 billion trade deficit with the rest of the world in 2018. The trade gap with China also grew to a record.
The Trump administration’s tariffs seem not to have had their intended effect. Officials can spin the growing trade deficit as evidence that consumers and businesses are confident about the economy. They are binge buying foreign goods because they have confidence and growing spending power.
The problem is that it’s still deficit spending. It’s just another piece of the debt-fueled “everything bubble.” From corporations to consumers to students to politicians, everyone is leveraging up to increase their spending power now at the expense of the future.
The debts will eventually come due. President Trump just hopes that doesn’t come before the 2020 election.
It’s hard to keep track of how many people have declared their candidacy for president on the Democrat side. One idea now being pushed by the left wing of the party is something called Modern Monetary Theory.
It’s a fancy name for money printing. Essentially, MMT would have the government just print whatever money needed to cover deficits instead of borrowing it in the bond market.
No longer would taxpayers be burdened with having to pay interest on new debt. But giving members of Congress blank checks to spend money into existence directly would blow any remaining semblance of fiscal responsibility in Washington out of the water.
Every dollar that government spends – whether that dollar comes from taxes, from borrowing, or is simply created out of thin air – extracts real resources from the economy. The real cost of government is how much it spends as a percentage of the economy.
In an extreme version of Modern Monetary Theory, there might be no taxes or borrowing of any kind. The government would just print what it needed to cover its spending.
That doesn’t mean we would get government for “free.” Oh, no – government would exact its costs on citizens by devaluing their dollar-denominated wages and salaries.
At first the inflation rate might just be the equivalent of a tax. But as the government progressively expands the currency supply year after year, inflation would accelerate and the economy would become unstable.
As the experience of Venezuela and Zimbabwe show, unlimited money printing leads ultimately to hyperinflation and mass impoverishment. All fiat monetary systems foster government excesses and subpar economies to some degree.
Sound money based in gold and silver serves as a time tested restraint on government. But you’re not likely to hear much about that from any of the 2020 presidential campaigns.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome Craig Hemke of the TF Metals Report. Craig is a well-known name in the metals industry and runs one of the most highly respected websites in our space and provides some of the best analysis on banking schemes, the flaws of Keynesian economics, and evidence of manipulation in the gold and silver markets that you will find anywhere.
Craig, welcome back. Thanks for the time again today, and how are you?
Craig Hemke: Mike, I'm fine, thank you. It's always a pleasure, and it's great to visit with you. I can't believe it's already been 90 days since the last time we spoke. I'm not sure where the time goes. All I know is it's still winter.
Mike Gleason: Yeah, I've got lots of action in the metals markets to digest with you. A lot's transpired over the last few months, a lot of the same sort of shenanigans, but we'll get into it nonetheless. As we begin here, Craig, you observed the bullion banks increasing the silver float, the number of open contracts, by 45,000 during the recent price rally in silver.
All that fresh new paper theoretically represents 225 million ounces. They sold all that paper short, but they certainly didn't go out and procure even a fraction of that quantity in physical metal to back it. There was no fleet of semi-trucks with 15 million pounds, which is what 225 million ounces is. We did the math here. They weren't backing up to COMEX delivery bays.
The banks simply sopped up the speculative demand by printing new contracts, enough to satisfy all comers. Pretty much none of that demand trickled through to the markets for actual bullion. Now, they're ringing the till, covering all those shorts. We aren't sure why, given your coverage as well as others, that there are so many investors foolish enough to walk into this rigged casino and make paper bets against these banks. Do you have any guesses about why folks still seem willing to play there, Craig?
Craig Hemke: Yeah. Again, I think it's too few people understand what's going on, and too few people have a vested interest in getting to the bottom of it. Look, we already know that the bond market is manipulated. That's what Quantitative Easing programs are around the world. We know that the Forex markets are manipulated, countries manipulate their currency all the time. We know the LIBOR market is manipulated, but yet everybody wants to tell you that gold and silver are these sacrosanct, perfect, free and fair markets. It's ridiculous.
The reason why this game continues is, too many hedge funds have their heads in the sand and don't realize it, and have no interest in getting to the bottom of this. What they are looking for when they buy these contracts is just typically exposure to the price.
They don't have any desire to buy any physical silver. They don't have any desire to hold any physical gold. They just want exposure to the price, and a lot of that exposure to price is just driven off of technical signals.
So, they'll sit there and, a little long, a little short, and then all of a sudden price will surge up through, say, the 200-day moving average. Then all of a sudden every technical and trading hedge fund that deals with silver suddenly want some exposure, because the lights are flashing off of their screen. They're not ever intending to take delivery, as you said. In fact, they're not even paying for their contracts. Everything's on margin. So, they put up $1 to get $8 or $9 worth of leverage. The banks issue the contracts under the same pretenses. They don't have the silver, nor do they have any intention to deliver it.
So you've got on one side, a seller that doesn't have any metal with no intention to deliver it. On the other side a buyer that doesn't have the money and has no intention to take delivery. But yet what's just such a scam is the fact that this process is what's used, still to this day, as price discovery for the actual physical metal, which is just nonsense.
But you're right, this is what happens. It's the market system that we have, and you're right, nobody really seems to get too upset about it, except you and me and a few other folks that all we want is just a free and fair price discovery system. Unfortunately, this last couple of weeks shows you we still don't have it.
Mike Gleason: Yeah, that's for sure. Now, despite the bullion bank suppression schemes, you're looking for a bottom here in the next few weeks, and then another rally higher, markets moving two steps forward and one step back. Talk for a minute if you would about what you're expecting in the months ahead.
Craig Hemke: Well, I haven't mentioned ... Maybe the last time we spoke we might've talking about this too. Talking? Let me say that again, okay Mike?
Maybe the last time we spoke we might have discussed this too. This year, 2019, and into 2020, reminds me a lot of the years, 2010 and '11, when I first got rolling with TF Metals Report. In that, back in 2010, the economy had come out of the whole green shoots thing and QE number one, which was going to be a one off.
Everything was rolling and the GDP was at 3% in the second quarter of 2010. Everybody thought we're great. And at that point, gold and silver were trending up, but mostly sideways. Silver was actually right around this same price level. $16, $17. Then we got to the fall of 2010, and that's when the economy started to slow.
All of a sudden we had QE two. Everybody lost confidence that the Fed had things under control, like they'd been telling us that they had. The dollar started to drop, and it was then that gold and silver really took off. We get into 2011, and there's all kinds of political discord, like we have now, only it's opposite parties.
There was a Democrat president with the Republican Congress, and now it's the opposite, but it was the same thing. We had all these investigations, we had political acrimony, we had debt ceiling debates, we had the S&P downgrade the U.S. credit rating for the first time ever in the summer of 2011. And all of that served as a further impetus and took gold all the way from about a little over a thousand dollars at the beginning of 2010, to $1,900 an ounce in early September of 2011.
I just see a lot of similarities, Mike. This year looks a lot like 2010, economically. I mean, everybody can see the economy is slowing. Even just as we spoke today, former ... I guess John Williams is still there in New York. He's still the Fed regional president in New York, and he's saying the 2.4 is the neutral rate. He said that today. The Fed is done hiking, any question about that. And every time in the past when they paused hiking, the next move is to cut.
Every time there's anybody from Powell to Williams or anybody else, they talk about, oh yeah, but the whole toolbox is open the next time the economy slows, whether that's more QE, negative interest rates, whatever. And there is a next time that the economy will slow. In fact, it's probably happening now. So this is a lot like 2010 right now.
Then we're easing into the next debt ceiling debate. We're already up against that. The U.S. lost its borrowing power, if you will. The debt ceiling expired back on March the first and has to be extended. Given the political situation in Washington with about a hundred different investigations coming from a hundred different committees investigating Trump, given the border shutdown and government shut down that we had a couple of months back, I don't see this debt ceiling debate ending in a positive manner.
That, again, looks a lot like 2011. So, yeah, we've had a difficult two weeks. We can get into the specifics of how that works if you want, but I don't think any of that should change anybody's optimism, and actually their certainty in knowing that prices are headed higher through the balance of this year and next.
Mike Gleason: That leads me right into my next question. I wanted to talk a little bit more about that political side of things. We've been reading that you've been talking a lot about those political risk drivers for metals prices in the months ahead. In fact, you just published something on that topic. The Trump presidency has certainly been contentious. You sort of outlined some of that with the investigations. There's no end in sight there, especially now with Democrats in control of the House.
These days, political drama is always front and center. Even in the financial press, trade wars, endless investigations, talk of impeachment, avowed socialists announcing that they're going to run against Trump in 2020 now. Plenty going on here. What is all this turmoil going to mean on the markets, not just the metals markets, but the stock markets, the dollar, connect some of those dots as you see it playing out.
Craig Hemke: Well, let's go right to where the rubber meets the road. I guess if we were to use traditional government statistics, 2017 into '18 were reasonably good times. The unemployment rate was falling, GDP was expanding, all that kind of stuff. That's what the Fed then decided they could start hiking interest rates, because things were looking so good. And a lot of that, in fact a great majority of that came off of Trump's election in 2016, because we went from this kind of malaise, sub 2% growth all through the Obama years, to all of a sudden there was this talk of tax cuts and infrastructure spending and all these things that raise the overall level of economic confidence, not just an individual's, but from businesses. If you're a business owner, a CEO, a hiring manager, and you feel confident about the future of your business and growing and making more widgets and all that kind of stuff, then you feel like hiring people.
And if you can't find enough people to hire, you might even give everybody a raise, or post a higher number that you're going to pay people that they come work for you so that you can produce more widgets, because the economy's growing, and all that stuff. So, a lot of this is about confidence. The dollar going up is about confidence. Everything in the bond market, all this stuff is about confidence. Well, the problem with these investigations, impeachment possibilities, it betrays that confidence.
It makes the consumer think, "Uhhh, I don't know." We're already seeing that with the retail sales numbers, the increasing savings rate versus spending rate. That's a consumer losing confidence. We're seeing it in business confidence going down as well. Soon you'll see upticks in the unemployment rate.
All of these things are coming, and it all ties back in then, Mike, to this… it becomes a self-fulfilling prophecy, where the economy slows even further. As the economy slows, the Fed stops hiking rates, which now they've done. Then they're going to stop with their quantitative tightening program. Then all of a sudden as it continues to go down, and Europe's slowing down even faster than the U.S., then all of a sudden you start talking about, "Well, we might need to do more QE."
The stock market already showed that in the fourth quarter. All of a sudden there's this selling panic, because liquidity was being drained back out of the system. So, in putting those things together, the Fed's in a corner. They have tried to maintain this illusion for almost 10 years now, that they have it under control. That, "We’ve planned for this. we've studied this for decades. We know exactly what we're doing."
No, that's not true. They've been flying by the seat of their pants for 10 years now. In an occasional moment of clarity, you'll actually hear that mentioned on a business channel, too, that this is all just one big experiment. They don't really know what they're doing, they're just hoping it works. So they've tried to maintain confidence across all levels, but especially in the currency for all of this time. And that's now when they kick back into QE and all that stuff, it's just like when QE two got started in 2010, because like I said earlier QE one was supposed to be a one off. Wait a second, there's QE two? That loss of confidence drove the dollar lower and spiked the metals. Again, that's a similar situation.
That's what we're seeing now. So, all of this is inevitable. It's not like I'm Carnac the magnificent and I'm trying to just tell the future. I think anybody can lay all these out in a row and see where this is all headed and connect these dots. The point of you and I discussing this, I suppose, is just so that people understand this, and they can use this to their advantage and plan ahead and begin to think about what are they going to do as gold goes back to $1,500 and beyond? What are they going to do when silver breaks out above $20? Are they probably just going to say, "A ha, finally I can sell all this stuff." Or do they recognize it's probably going to keep going from there. I mean, the time is now to be making these plans, because all the rest of this stuff, economics, markets, all that stuff, that's almost an eventuality that's going to play out.
Mike Gleason: Yeah, we certainly agree. And obviously there's some big overhead resistance levels in some of these metals, especially gold, and as it takes it out, you got to think it could just be off to the races once we finally break through that ceiling that we've been coming up against several times over the last few years, that $1,370 - $1,380 mark. I know you talk about that a lot as well.
You've been keeping a close eye on the palladium markets. That's certainly where the price action is these days, but that market may be most interesting for its potential to blow the lid off of the fraudulent nature of the futures markets. Can you update our listeners on what's happening there in palladium now? I know we spoke about this last time we had you back on in December, but it's making even more noise now. Talk about palladium, Craig.
Craig Hemke: Isn't it remarkable? Yeah, and I always state, man. Whenever I talk about this stuff, I'm not trying to tell people to go out and buy themselves palladium, though I know a couple of people on my site have. They've picked up little one ounce bars of palladium just for fun. I don't see this, unless you want to trade at one of these ETFs or something, I don't really see it as an investment opportunity, as much as I see it as a way to pull back the curtain. Shine the light of truth upon the fraud of these fractional reserve and digital derivative pricing schemes that we have.
I mean, you and I have just spent 20 minutes talking about how silver is just such a scam. That speculators show up and buy these contracts, and the banks issue the contracts figuring they can just wait them out, and then price rolls over, and as you said, they cover the contracts back.
Well, the problem right now in palladium is that there's no palladium left. It's been living off of a supply deficit for about the last 10 years. And there are very few available stocks of palladium left, a couple of ETFs. Hell, even the entire COMEX vaulting system only has 42,000 ounces in it.
So, it’s rapidly becoming a problem for the banks. The banks don't have metal, so they can't just blindly naked short it. It'd be suicidal to do that. And so, the paper markets are useless for trying drive price back down. And this action isn't in the paper markets anyway. I see this nonsense foolishness from some of these old-time traders and generalists out there, I read it on Twitter. They say, "Well, it's just a bubble." No, it's not a speculative bubble at all.
The open interest on the COMEX is actually down over the last couple of months. The trading volume is pretty steady at around 10,000 contracts a day. It's not like every cab driver and shoe shine boy is talking about palladium. Where the real value here is, is that it's a symptom, or it has the potential to, like I said, shine the light on the disease that is this pricing structure. Because if palladium, being structured with a pricing scheme identically to gold and silver, and platinum for that matter too. If palladium were to fail, if there was a failure to deliver on the LBMA, or if the COMEX declares a force majeure because again, they only have 42,000 ounces in the vaults. It's only enough for 420 contracts.
If there is a failure in the paper palladium market, I would sure hope that a new generation of, let's call them ... if you remember the bond vigilantes, a new generation of precious metal vigilantes would go, "Well, hold on a minute, wait just a second. If the palladium market is a scam, maybe the gold market's a scam too, and silver too." And you get a whole bunch of them demanding immediate delivery and that kind of stuff and maybe the Jig is up.
Now look, that's probably a pipe dream. The dream continues, because as you said, we've been talking about this for months and price keeps going up. So the dream is still alive. Every time in the past we've thought we've had the banks where we want them, they've somehow managed to wriggle off the hook, whether it's through margin hikes, something coercive behind the scenes with the CFTC or the CME. Actually, you know what, Mike, there might even be a complete breakdown in palladium and force majeure in COMEX and all this kind of stuff. You know what the collective reaction might be? Crickets. Yawns. "Whatever. It just palladium, who cares."
Mike Gleason: Yeah, just palladium. That's a niche market, much smaller gold and silver. So what difference does it make?
Craig Hemke: Yeah, so this may all happen. This may all come to pass and it won't even matter. But for now, the main thing is, like I said, it's not so that… go buy palladium and see if you can't sell it for $200 more a couple of weeks from now. The hope is that it's a crack in the foundation of this fraudulent system, and that hopefully that crack opens up a chasm and these banks just fall into it and die.
Mike Gleason: Wouldn't that be nice. Yeah, it was about $1,200. I was looking at this before we spoke today, here. It was about $1,200 an ounce back in early December when we spoke quite a bit about palladium, the last time we had you on. It's up another 25%. It's over $1,500 now. It just keeps on going. It's really amazing.
Craig Hemke: Yeah, and it's critical to know. Again, it's NOT some paper driven speculative bubble. I mean, this is all driven by a lack of physical supply in London, primarily, where the lease rates are in excess of 10%. You can see that it's a lack of physical supply by the backwardation of the futures board. Okay. Everybody recognizes that as a physical shortage, and it continues, and it seems to be unrelenting.
When we had a situation like this bubble up about 17 or 18 years ago, palladium got to $1,100 an ounce. And Boris Yeltsin was convinced, as the leader of Russia, which produces about 40% of the world's palladium supply, Boris Yeltsin was convinced to ride to the rescue and save the banks, then. I don't think Putin's going to ride anybody's rescue now. And so, this does definitely have the potential to get out of hand.
Mike Gleason: Yeah. If they suppress the silver price long enough, there won't be any physical supply left. Maybe we'll have the same sort of dynamic take place there, perhaps. Maybe all of a sudden physical silver gets short and then we could have a similar event, true price discovery. I guess that's maybe the hope anyway.
Craig Hemke: That's the hope. And while you mentioned silver, Mike, there was a point I wanted to make earlier when we were talking about increasing the float of contracts, okay. As the silver price moved higher back in December, it moved up 8% and the supply of contracts was held flat at about 178,000 to 180,000.
It was only after it moved through the 200-day moving average and all these funds got interested in having silver exposure that to meet that extra demand, the banks just simply issued more contracts, taking the risk that they could wait out these funds and roll the price back down. And now as we've seen in the last 10 days, that's exactly what happened. But think about this, everybody is seeing maybe Fast Money on CNBC, or any show on CNBC, and how these guys just go crazy anytime the stock market goes down, right?
I mean, the Algos and all the machines are just fine when they're endlessly pumping stocks, but as soon as the stock market goes down 1% we need congressional investigations about the dangers of HFT (high frequency trading) and all that kind of stuff.
Can you even imagine the outcry if Netflix, or Google, or Amazon, if the market makers on the Nasdaq or the in New York Stock Exchange, were able, anytime there's demand, because of positive fundamentals for those companies, if the market makers just simply increased the float of outstanding shares by 25% every single time, thus muting any price rise, oh God, Mike, the SEC would come riding in, and their jackbooted thugs would kick down the doors of the exchange. I mean, it would be the biggest scandal in history, but that's exactly how the silver market works and nobody cares. That's remarkable.
Mike Gleason: Yeah. We'll just keep beating our head against the wall, I suppose. Eventually I think we'll see a brighter day ahead, as you spoke about. That's the hope, anyway. Well, fantastic insights as always. Thanks, Craig. And before we say goodbye here, please tell everybody about the TF Metals Report and what it is, so that they'll visit your fantastic site.
Craig Hemke: Well I appreciate that, Mike. Yeah, thank you for the kind words. It's fantastic because of the people that belong there, really. I do research every day and write a report every morning and record a podcast every afternoon and interviews with people in the industry and stuff like you do. But really, it's the camaraderie of the community that is the most beneficial reason to join, and it's only 12 bucks a month. So, it's not like it's like a bank breaker to join there.
But at this particular moment, given what we said about the obvious way the dots connect, about where this is all headed, it couldn't be more important to have a subscription to a place like TF Metals Report. So, I encourage people to check it out. This is the time to be planning ahead financially, but also emotionally for what's coming. And I think this is the best place to do it. Just TFMetalsReport.com.
Mike Gleason: Well, excellent. Thanks again Craig, all the best to you in 2019. We appreciate the time, and hope you have a good weekend, my friend.
Craig Hemke: All right, Mike, thank you very much.
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 you to check that out so you too can get some of the very best commentary on the metals markets that you can find anywhere.