Mike Gleason: It is my privilege now to welcome in 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 the 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 and thanks for joining us. How are you today?
Craig Hemke: Mike, Happy Pet Rock Day. As we record this it's July 17th, that is the four year anniversary of the infamous article written by Jason Zweig of the Wall Street Journal where he said, "Let's face it, gold is just a pet rock." So Happy Pet Rock Day, my friend.
Mike Gleason: Good start. Craig, I want to talk about silver first off here. Silver is showing some real life finally these last couple of days. It has been underperforming gold and that was certainly making us a bit nervous, we'd rather see silver confirming gold's move higher. James Turk was out with a great statistic this week talking about how there have been 11,186 trading days in the COMEX since the prohibition of owning gold was lifted in January 1975. The ratio traded at 93, as it did just a few days ago, or higher, only 82 days. 82 days out of over 11,000 so you get the feeling for how extraordinary the current discount in silver is relative to gold.
What do you make of silver's under-performance to this point, Craig? And then, what are you expecting for the white metal moving forward and is this bump that we've seen here over the last few days in silver the start of something, perhaps?
Craig Hemke: Mike, that's a question that requires a whole bunch of different answers that hopefully kind of tie together. First and foremost, people need to understand that in 2009 to 2011 that most recent price run that took us all the way to $49 was fantastic obviously, but the last part of it from $38 to $49 was almost exclusively what we call a commercial short squeeze. The CTFC data, the Commitment of Traders report, the bank participation report all bore that out back in 2011. And what I always thought was going on was that you had the story of JP Morgan had inherited this massive short-position from Bear Stearns and they were maintaining it rather than getting out of it and thus were getting squeezed. They had no physical silver. Back then they were immediately rubber-stamped in the spring of 2011 to start their own COMEX silver vault. And in the eight years since, that vault now controls more than half of the total vaulted silver on the COMEX, more than 150 million ounces they've accumulated. Most of it through their proprietary house accounts, stopping 1,000 contracts or so every single month and taking into delivery and holding it in the eligible accounts.
First thing you've got to understand is JP Morgan still has a monopolistic control of the pricing structure, at least as it applies through the COMEX. They’ve worked very hard in the last several years to paint silver into a corner and you can see that on the weekly chart. Maybe there's a physical floor at around $14, the price keeps getting wedged tighter and tighter into a corner below some trend lines, the 200-week moving average. Why is silver under-performing? I think that's it. I think these banks, JP Morgan and Citi, specifically, make a boatload of money shorting it on a consistent basis, issuing new contracts, taking the risk of being short against the speculator longs, that they can just outwait until the speculator longs rollover and then get back out or even move onto the short side.
So, I think that's the biggest thing. I've been telling folks on my site that I would not at all be surprised to see the gold/silver ratio go to 100 to 1 before silver finally breaks out just because of that monopolistic control of the pricing scheme by those banks… meaning gold could go to $1,600 while silver could still be at $16. Now recently, here this week, we've seen silver rally and there's a lot of speculation as to what's going on with that. The thing I think is probably most interesting and perhaps even most valid is this idea that some big institutions have been, because of looking at the gold/silver ratio, have been long gold and short silver in this process. You can see ... maybe you can see it some of the data ... and now they're taking those trades off, which has maybe been holding gold back this week while silver has been rallying.
I don't know, there might be some validity to that, but let's watch real closely here, Mike, because yes it's exciting. Silver's picking up, but man, there is an incredible amount of technical and we'll just call it bank-created resistance between about $15.80 and maybe $17, so let's get above $17 and your old friend Craig is going to start getting really excited, but between now and then, it's still going to be a tough fight for this next 10% from here.
Mike Gleason: Yeah, still stuck in that range for sure and until it pops through that one way or the other, it's hard to get too, too excited, but we'll be watching. You wrote something on Tuesday that I wanted to get into. The current interest rate environment is a killer for banks, at least to the extent they are relying upon banking MO of borrowing at lower interest rates and lending at a higher rate, making a spread. Right now the margin is pretty low, the Fed funds rate is currently higher than the rate of a 10-year Treasury. Banks borrowing at the Fed's discount window are finding it difficult to lend profitably.
At least the current rate environment finally killed the free-money scheme by which banks borrow at zero from the central bank to then buy Treasuries, pocketing two or three percent. Deutsche Bank recently announced massive layoffs and is restructuring its business so that, coupled with your observation about the tough operating environment for banks makes us wonder if there are other casualties coming. What are you expecting there? Talk about the banks here, Craig.
Craig Hemke: Well, I tell you what, Mike. Talk about history repeating and rhyming and all that kind of jazz. There’s a reason why, if you plot the chart of the yield on the German 10-year bund together with Deutsche Bank common stock you see they move almost together tick for tick and as rates go more negative in Europe, it's just killing the European banks because again, traditionally the bank business model is to borrow short and lend long and pocket the spread. That's how banks have operated for centuries. Well the problem is now the short rates, especially in the U.S., are higher than the long rates.
How do you make any money in that regard? You're seeing that now even in the U.S. banks. Wells Fargo was talking about that yesterday. Citi talking about that today on Wednesday, the 17th and this is clearly a problem for Deutsche Bank and the rest of the EU banks. And then what does it do? It drives the kind of behavior that led us into 2008 where the banks can't make money the old fashion way of printing it and then stealing it from everybody on the interest on the money they create. No, they've got to branch out and do all kinds of risky crap like create credit default swaps and CDOs and all of their proprietary trading and investment banking and all the stuff as they've had to take on more and more risk to generate more and more return and line their bonus pools that led us to the events of 2007 and 8. Well, here we go again.
They can't make money the old-fashioned way, so now they're going to start continuing down this road of more and more risky ventures. Don't underestimate too, Mike, all of those European banks are tied together in kind of a daisy chain of risk where Bank A owns the debt of Bank B and Bank B owns the debt of Bank C and Bank C owns the debt of Bank A. And so if one of them starts to struggle and fail, it's like an industry-wide margin call and you get this run on those banks. This is a really nasty situation all brought to you by your glorious charlatans at the ECB and at the Fed that have tried to maintain this illusion for now a decade that they have it all under control. They know exactly what they are doing and that things are going to one day go back to normal.
Nothing could be farther from the truth. The recognition of that is what is now driving gold and silver higher this year and as this continues to play out, it's going to drive both even higher the remainder of this year and into next.
Mike Gleason: Staying on the topic of the Fed. People have been wondering why, if the U.S. economy is so strong, the FOMC is likely to start cutting interest rates when it gets back together in a couple of weeks. Perhaps the pain in the banking sector is part of that answer. We know the central banks actual mandate is to defend private sector banks, it isn't maintaining a stable currency in fostering for full employment, the nonsense stated publicly. But in addition to their commitment to maintaining the profitability of banks, there's also plenty of evidence that the U.S. economy is nowhere near as strong as represented.
What do you see as the Fed's motivation for lower rates, Craig? And where do you think the FOMC is headed over the next year or two?
Craig Hemke: Mike, this is what I've been talking about at TF Metals Report says since last year, specifically late last year: is that 2019 is going to look a lot like 2010 and that in 2010 we were told that QE1 was just a one-time deal. There were green shoots to the economy everywhere. Ben Bernanke was hailed as the savior on the cover of The Atlantic. All these different things about how ... oh look, we're saved, everything's great. And we were cooking along, more than 3% GDP, but then we started to fail in the third quarter. By the fourth quarter, a negative GDP and the first quarter of '11 was negative as well thereby there's your recession. The Fed responded in November 2010 with QE2, loss of faith and confidence that the central bankers had any idea what they were doing is what eventually drove a dive in the dollar, silver from $18 to $48 and gold from $1,160 to $1,920. Well here we are again, right.
We were told in the beginning, even late last year there were going to be four rate hikes this year. All the Wall Street economists were echoing, parroting that from the Fed. We were told the economy was just growing infinitely, everything was just hunky dory and all this beautiful stuff, and I said, "No way, uh huh. This is all going to come crashing down, recession is inevitable." And so now these moves by the Fed revealing themselves to be the charlatans that they are – they’re just making this stuff fly by the seat of their pants – it’s all playing out like we said now in a retracement, something that rhythms at least with 2010, but when you look at why the Fed is looking to cut ... you read all this stuff, and yeah, but look at retail sales and the employment report and we can talk about the BS of those particular government statistics, but in the end the Fed knows their only hope to keep the place spinning is economic growth. It's got to keep the U.S. economy chugging along so that the stock market keeps going up and they can keep this illusion going that they have some control.
Well, anybody that's ever-studied economics knows that an inverted yield curve invariably leads to recession. Now, you can just look at it straight as lower rates on the long end versus the short end or some people look at other metrics. Is the three-month T Bill below Fed funds and is it there for more than a month? Is that the thing that guarantees a recession is coming? Either way, all I know is an inverted yield curve, where the Fed funds, the short rate, is higher than say the 10-year note leads to recession every time and these fuzzy headed academics at the Fed know this. The Fed funds rate is basically quoted at 2.4%. The two-year U.S. Treasury note is 1.85. The 10-year U.S. Treasury note is 2.1. so just simply to get the yield curve to be flat, the Fed needs to cut 50 basis points, lowering the Fed funds to 190 versus 185 for two and 210 for the ten.
They owe us probably 75 to get it down to 165 and at least have a positive slope again. That, Mike, is why they're talking about cutting rates. All the other stuff, inflation, that's all just window dressing to try to mollify the masses and keep them confused and buying stocks. They are looking to cut the Fed funds rate to simply reestablish a positively sloping yield curve. Help their banks for the same reasons that we talked about in the first question and then hope to keep the economy growing. I think they are behind the curve; they've been behind the curve all year. They'll continue to be behind the curve. I would love it if they did not do anything two weeks from now and didn't even cut at all. That would be fabulous, if they didn't do anything. But they'll probably cut 25 and talk about cutting at least 25 more. That will still continue to be beneficial for the metals as people figure out once again, like they did in 2010 that the emperors have no clothes as that awareness ripples through, again, precious metal prices just continue higher.
Mike Gleason: Obviously the real interest rate environment is what drives a lot of metals prices or drive them higher so that's certainly what we'll be looking for.
I want to get back to Deutsche Bank here for a second. Talk about that specifically if you would. We've all been watching the share price move lower, they've had constant legal troubles and they are loaded with bad debt. Part of the restructuring plan entails dumping $50 billion of toxic assets. They will be laying off 18,000 employees around the world. The big question is whether that will be enough to save them. ZeroHedge reported a quasi-bank run earlier this week, it appears nervous clients are pulling roughly $1 billion per day of deposits.
Deutsche Bank has $50+ trillion in derivatives exposure. What do you think? Will Deutsche Bank survive, first of all? Will Germany step up with a bailout and could this be the first domino that falls and starts a global economic panic?
Craig Hemke: Yes, yes and yes. How's that? You like that? That a short enough answer? Deutsche Bank will survive in some form because, yes, the German ... it's the national bank of Germany. They'll step in, the Bundesbank will step in regardless of what the ECB says what they can or can't do. And they'll keep it afloat. Now in the meantime, you mentioned this money flowing out of there, think if they’re acting as custodians for all your funds, for all your hedge fund, all your money in your hedge fund and you're moving it all over the place, the last thing you want to do is see Deutsche Bank shuttered or a bank holiday or something like that. You don't have access to your money for a certain period of time. It's like, you might remember when MF Global bit the dust back in whatever that was, 2011.
I think eventually most everybody, whatever cash you had in there, you got back, but it took months. You got a little bit at a time over months. Well, if you had a billion fricking dollars in your hedge fund at Deutsche Bank, do you think you want to play that game over the next six to 12 months? Not a chance. So then there's a possibility that that becomes kind of a critical mass exodus. Now Deutsche Bank's a huge bank with supposedly billions if not trillions in what they would consider to be assets, but nonetheless, that's a lot of cash that could really head for the exits and put them in quite a bind.
The end game of all this, though, is what we talked about at the beginning about how all of those European banks are linked together and to some extent the U.S. banks are linked to them as well. A renewed, even more severe EU banking crisis is most likely what's coming, which is why the ECB is talking about restarting QE and buying whatever debt they can get their hands on over there. All of that is what's driving interest rates even more negative in Europe. I mean, we're up now over 13 trillion globally in negative yielding debt, even junk bonds are now negative yield in Europe. Even emerging market debt is even now negative yielding. This is madness.
But when the central bankers set off on this course to create 20 trillion in fresh currency over the last decade, that money just sloshes around the planet and when the risks get high, just simply getting your money back in 10 years from Switzerland, that sounds like a pretty damn good deal. And so all of this feeds on itself. It certainly appears that we're reaching a point of critical mass here in 2019.
Mike Gleason: Craig, before we wrap up, I'd like to get your thoughts on maybe the technical side of gold and silver here. What levels you're looking at, you spoke about that a little bit earlier with silver maybe over $17, kind of being the breakout point that we need to see breached. What levels are you looking for and what would you get excited about if we took them out to the upside and then conversely, where on the downside do we need to hold if we do see a pullback. Let's get your update there as we begin to close and then perhaps anything else you want to touch on.
Craig Hemke: Mike, let's go back to silver real quick because I want to make sure it's clear what I'm talking about, and I'll send you a chart that I posted for everybody on my site back on Friday, the 12th that illustrates this point. On the weekly chart of silver, since everything broke down in 2013 and everybody remembers that back in April 2013 when gold fell $200, was smashed down through $1,525. And silver fell $3 in a day, smashed down through $26. I mean, we've been going sideways. Now, gold is finally breaking out, but silver is not. And if you look at a weekly chart of silver, you can clearly see three obvious points of resistance. One, there's the main trend line that starts back at the recovery high in August of 2013 when price got all the way back up to $25. You connect that to the next high of near $21 in July of 2016 and continue that on down. That's the line that's near $17.
Now below that is the 200-week moving average, which we barely got above in 2016 and then every single time we've gotten above that 200-week moving average on a weekly closing basis, from the middle of 2016 to the middle of 2018, we were immediately smashed the very next week and that doesn't happen by accident. That's JP Morgan and Citi making sure there’s no breakout. It's happened 15 times, 15 weeks where price closed above the 200-week moving average only to be smashed the next week with a big red candle. Sol, you've got to figure that trend is probably going to continue.
The 200-week moving average right now is at $16.28. And then if you draw a parallel line to the main line, and you start it when that 200-week moving average was first broken in September of 2016, you'll see a whole bunch of tops that connect with that line through '17 and '18. That line is around $15.80. So, between $15.80 and $17, as I mentioned earlier is a tremendous amount of bank created and technical resistance. That's why I think gold continues higher and silver continues mostly sideways maybe for another six to eight months. And that's why I think the gold/silver ratio could go to 100.
Now, at some point the demand for silver, just simply because the substitution effect will take over. Now what do I mean by that, that's where economists talk about well, you know, when things are bad, instead of buying steak, you buy hamburger. Well if gold keeps going like I think it's going to go, to $1,600 and $1,700 and back up to the old all-time high, just like its doing in every other currency, at some point people are going to go, “Well, hell's bells, what is silver doing at $16?” And then it's going to break out and then it's going to feed on itself and it's going to get a whole bunch of positive momentum and people are going to be seeing it just like they are seeing now in gold. So, to begin with in silver, I just think it's going to be a tough ride. It doesn't mean you can't trade it and make money, but it's going to be a tough ride maybe for another six months.
Gold, on the other hand, everybody knows it broke out through $1,360, that was the top end of the range it's held since 2013. Last week it posted its highest weekly close since May of 2013, it's even higher now. All of the stuff that's going on between the central bankers and, don't forget about political risks. Gosh, that summer of 2011, we had the U.S. credit being downgraded by S&P, we had the massive gridlock and debt ceiling debates in Washington, DC. Well, all of that's happening again now, here in the summer of 2019.
Gold's going to keep going higher, though of course obviously never straight up. It's overbought. The Commitment to Traders report is heavy and all that kind of stuff, but the next target from here once it's above $1,440 is maybe $1,480. The key level, I mentioned a second ago is $1,525, that was the level that held for 19 months from 2011 into 2012. That was a level that was taken out in April of 2013. $1,525 will be a key important level of resistance in the months ahead. I think we go up and get close there some time before the end of this year and then go blasting through there next year. Either way, both metals look great and man, oh man, should people be buying the shares. My friend, Eric Sprott told me a little over a month ago that in the early stages of a bull market it's the large cap, high cost producers that really make money because if you're making $100 an ounce at $1,300 gold, you make $200 an ounce at $1,400 gold, so you just doubled your earnings. And thus, we're seeing the large big shares, the HUI Index, the GDX just going like crazy. That's a sign of an early stage of a bull market too.
Everything looks good, but again, never does it mean we're going straight up, but all of these forces that I've been writing about, that you and I have been talking about, that I'm sure you're telling your listeners on a weekly basis, are really coming together. You should be averaging into your metal stack if you still have a higher cost basis than the current price you should be adding into it now. You should acquiring new metal now. Now is the time. This is the early stages of renewed bull market and you do not want to fall behind and be trying to play catch up all through the remainder of this year and into next.
Mike Gleason: Yeah, figures it can get pretty exciting and does seem like we're on the verge of something that could be maybe explosive perhaps and look forward to catching up with you as that unfolds. Well, outstanding commentary once again, Mr. Hemke and thanks for your time today. Now before we sign off, please tell everyone more about the TF Metals Report and what it is that they'll find there if they visit your site.
Craig Hemke: I'm sorry I can't stop laughing about this Mr. Hemke stuff, Mike. That's okay. You can call me anything you want; I've been called a lot worse especially on Twitter. Anyway, the TF Metals Report obviously there's never been a more valuable time to be a part of it. What I do, all of this analysis is only $12 a month, so it's 40 cents a day. I think the people that subscribe have recently felt like they get a pretty tremendous value. I think we do a pretty good job. But the community itself is fantastic. There's people from around the world, literally around the world of all political persuasions, all working together helping each other out to see ourselves through this madness because we recognize at the end of the day we’re all in the same boat, man, whether you're a progressive or a conservative or whether you live in Australia or whether you live in England.
Join us at TFMR, it's a great place to discuss the metals. I'm pretty proud of what we've built there, we've been around almost 10 years and it's finally starting to get fun again, TFMetalsReport.com.
Mike Gleason: You should be proud, it's a great site and we follow it closely here in our office, I can tell you it's fantastic analysis and everyone should definitely check it out. Excellent, thanks again, Craig. Enjoy the rest of your summer and I look forward to our next conversation. Take care my friend.
Craig Hemke: All the best to everybody on your end too, Mike.
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 will find anywhere.
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