With the world re-entering a period of greater economic instability, with the central banks painted into a corner, with global stocks looking weaker by the day, the price of gold is starting to shine again.
The yellow metal has recently hit all-time highs priced in a number of world currencies (the dollar not among them…yet).
Is this a short-term result of ‘risk-off’ fever as the markets have stumbled, to be undone during the next rally in stocks? Or are we seeing the beginnings of a more fundamental re-pricing of gold (and silver), as investors wake up to the currency risks created by more than quintupling the world money supply within less than a decade while simultaneously buring the economy under trillions of newly-minted debt?
Craig Hemke, better known by his nom-de-plume, Turd Ferguson, explains why gold looks like it finally has a brighter future ahead:
Gold and silver aren’t priced through the Exchange of Physical Metal, but through the Exchange of Derivatives. They really have no link to physical metal.
People are puzzled all the time about how in the world can the ratio of the price of gold to silver be 90 to 1, when historically it has always been anywhere from 10 to 15 to 1 based on the amount of physical silver allegedly in the ground versus physical gold. I will tell you why it is 90 to 1: it’s because you’re not pricing it off of the physical supply anymore. You’re pricing it off the supply of these derivative contracts instead.
If anything demonstrates how perverted the system has become, it’s the gold and silver ratio.
Our expectation – and we continue to wait for it – is a breaking point with all of the leverage, the re-leverage, the re-hypothecated, the unallocated accounts, all the alchemy that has been done by the banks to create all these different exposures and forms of exposure to a market rather than the market itself. Once that finally is forced to unwind, that’s when things are going to get really interesting.
In the meantime, everybody that bought physical gold and silver — myself included – in 2010, 2011, 2012, the conditions that led us to think precious metals were great hedge have not changed. In fact, as you and I have discussed, conditions have only gotten worse. The systemic imbalances have only become more extreme. Yet, because the price has gone sideways for gold for the last six years — admittedly there has been a stinging opportunity cost for the cash you put in gold and silver over the last seven or eight years. But the conditions that led you to buy them have not changed.
Now that we are at the point where we are today, when the tide of confidence in the Central Banks is ebbing, we may see a runup in the dollar price of gold and silver again pretty soon. Look at other currencies around the world like the Australian dollar, Canadian dollar, the Indian rupee, the Turkish lira. The all-time highs for gold priced in those currencies are being made now. It’s just not happening in the dollar. Yet.
But it will be the dollar’s turn soon enough. That is what I keep trying to remind people of. To keep reiterating that nothing has changed macroeconomically, or from a financial system standpoint. The reasons that you bought gold and silver in the first place have not changed.
Click the play button below to listen to Chris’ interview with Craig Hemke (47m:35s).
Chris Martenson: Welcome everyone to this Featured Voices Podcast. It is May 29, 2019. I am your host, Chris Martenson. We have many views at Peak Prosperity. But a central position is that the central banks are not your friends. They are instead stewards of a system of extraction and redistribution. They are not wealth creators. They are redistributors. Right?
The central banks vigorously defend the practices of exponential expansion on a finite planet and assuring that wealth concentrates at the very tippy top of the social and political pyramids. The central banks are also, drumroll please, staffed with humans. Mere mortals. This means they suffer from the usual collection of human attributes that have run civilizations all throughout history into a variety of ditches. Hubris, tunnel vision, dogmatic theologies, and belief systems that do not align with the real world are working against our collective best interest today just as certainly as they did for the Aztecs, for the Mayans, and for the Romans. It is just for different sets of bad reasons. Right?
With respect to modern Central Banks, the easiest test to administer to detect just how close to the ditch we are is to look at the balance between how many monetary claims have been issued as compared to the real economy. How much money and debt has been emitted versus how fast the economy or global income has grown? Now there we see evidence – solid evidence – of the oldest of all banking mistakes being committed yet again.
Let us look at it this way. Global debt, already staggering before the onset of the Great Recession in 2007, has grown by over $100 trillion while the global economy has increased only $25 trillion. That is a four to one increase of debt over income. The value of equities, which are also claims on that same GDP number just like debt, equities have increased dramatically hitting all-time new highs in both nominal terms and expressed. This is as a percentage of global GDP. What I am saying here is the claims have exploded. The underlying economy has limped along.
What is next? Probably, if you are a betting person, it is more of the same. More printing. More interventions. More attempts to keep the credit levels exploding even higher and faster than they already are. This is why today’s guest is especially relevant. Neither you nor I can do anything about how much currency the Central Banks decide to print up as they run their scheme off into probably the biggest monetary ditch in human history. We can protect ourselves by stepping outside of their system into the world of real or hard assets.
Today we are speaking with Craig Hemke, AKA Turd Ferguson, founder and proprietor of the Precious Metals blog TFMetalsReport.com. Turd, or Craig, was a licensed securities professional for nearly 20 years before leaving the profession in 2008 – disillusion perhaps – to become a self-described serial entrepreneur. Since then, he has become one of the more popular, and for sure one of the most colorful, voices advocating for gold and silver ownership by the average investor.
Every month, hundreds of thousands of readers visit TF Metals Report eager for his analysis. This is as well as very specific short-term price predictions for where the metals are headed. Hey, it has been entirely too long since we have had him on. Craig, welcome to the show.
Craig Hemke: Chris, what a pleasure. I always tell folks when they ask me who the smartest person I know is, I say it is Chris Martenson. I say that. I am not kidding. That is what I always say. It is always a pleasure to visit with you. Thanks for having me on again.
Chris Martenson: Oh, it is just a real pleasure and real honor to have you on. Craig, before I hit the record button, you and I were having this rolling conversation. As distinctly as you can, how would you describe this particular era that we are in in terms of what it means for the average investor?
Craig Hemke: I think in your opening monologue there, you covered a lot of bases. I think you succinctly described the problem even in a broad sense. I think that the biggest challenge for the average investor is that kind of – I do not want to call it contrarian. Maybe it is more out of the box. It is individualistic thinking rather than herd thinking. That is very difficult for people to do, especially when we are discussing subjects that have not occurred in people’s lifetimes.
I always remember, say for example my grandparents who lived through the Great Depression. They had canned goods and all these things stored in their basement. Even when I was a teenager in the eighties, they still had canned goods in their basement. I remember talking to my grandparents at the time. They have long since passed away. That was the refrain. Once you live through a depression, it kind of changes you. It affects you. It impacts how you plan and prepare going forward.
Nobody alive today has lived through, and therefore can anticipate, what is coming. That is a very difficult step for a human mind to make. You know? You listen to all the talking heads on CNBC, Bloomberg, and every place else. There is your stockbroker, you name it. The only system they have ever known is this dollar reserve system giving the US this exorbitant privilege as Secretary Connelly called it. That has been in place since Bretton Woods 1945.
Really, when you get an octogenarian plus as the only people that are still alive today that remember the time when the dollar was not the central foundation of the world monetary system, but that is a transient privilege. I mean, anybody can trace that history back. It was pound sterling before it was the US dollar. It is very difficult for people. If they do not have a history that they can recall, to then project forward into what is coming next. I think that is the biggest problem facing people really particularly since 2008 or ’09 since the death bells were rung for this system. We have been. The banks have been zombies. The Central Bankers have propped it up through all of this money issuance, now negative interest rates, and bail ends, and all the other stuff they have planned for the next crisis. Yet, nobody can really.
It is very difficult for people to see that coming and to project where the system flips back to. I think that is human nature. It is kind of a cognitive dissonance that people have to overcome. I think that is what you do a great job of, and that is what I try to keep people focused on, too.
Chris Martenson: Very well said. One of my catchphrases is the next 20 years is going to be completely unlike the last 20 years. What that is really speaking to is this idea that as humans, it is very typically normal, ordinary, I do it, everybody does it, to base what the future is going to be based on what just happened.
Craig Hemke: Right.
Chris Martenson: We are all expecting the road to continue straight. The trouble comes when there is a sharp corner in the road because obviously it is very hard to detect those in advance. We are unprepared for them. I think a lot of people have gotten complacent and grown into this idea that what the Central Banks started to undertake in a coordinated fashion in 2007 and ’08 when they started doing this quantitative easing, monetary printing, or balance sheet expansion – whatever your favorite term is. People in the last 11 years have said I guess that is how things are now. That is the road. The road is straight in this direction.
Craig Hemke: Right.
Chris Martenson: We can count on the central banks always doing that. What I find unique at this point in time is for that to have worked, it required all the Central Banks to have been in unified behavior sets. Right? Bank of Japan had to be doing it along with the European Central Bank and the Federal Reserve. It is the minor Central Banks of Australia and Canada, but also the People’s Bank of China. As long as they were all kind of doing the same thing, it worked. Now we are starting to see some ruptures in that.
You mentioned the dollar reserve system, so I am going to jump ahead a few questions and get into that. There is some exciting stuff happening – or interesting. When we see how the United States has been using the dollar as a club and threatening Europe, we are going to lock you out of the US banking system and threatening. Obviously, they have already having swift challenged Russia, putting economic sanctions dollar-based on Iran, and then also threatening China with the same stuff. How do you see that potentially shaping the future?
Craig Hemke: There is no question. Those are the flailing threats of a dying regime in a sense. You are just so desperate to keep everybody in line that that is the hubris of all of this.
Chris Martenson: Yeah.
Craig Hemke: It is not necessarily financial or monetary terrorism. It is definitely bullying. All the way down to the individual level. If you get bullied long enough, you finally say I am sick of this crap. Right? I am going to search out something else. I think when the system really died back in 2008, I think the dollar creditor nations – those countries that have been accepting dollars for goods whether it is Saudi Arabia and the Gulf States accepting dollars for oil under the petrodollar system. Or it is whether it is the Chinese and all of the bricks countries that have been accepting dollars for goods. I think that has all kind of been set up that way as well deliberately. I think all those countries with dollar reserves looked around and went, wait a second here. Hold on just a minute. There are some problems with this.
As you mentioned, in the effort sense we are now down to you get 25-cents worth of growth for every new dollar of debt. These problems are becoming even more apparent. I think in 2008, a lot of those creditor nations were caught somewhat flat-footed. They did not realize how hostage they were, and how tied they were, to the system. If you and I can see this, and if you and I can discuss this, and have been discussing this for years; I am pretty sure that the smart people in these other countries can see it coming as well. They have been laying a foundation slowly and gradually over the last ten or eleven intervening years since the financial crisis. This is so that at a point, maybe of their choosing in the future, they will begin to offer an alternative. That does not necessarily replace the dollar as a reserve, but it supplants it as being the sole reserve.
Then you start getting into a system where, oh wait a second. We have way more supply of dollars than we have demand for dollars. That then becomes a real problem for the US and for the US current monetary system. Anybody that has taken Econ 101, you know if supply increases while demand falls for any good, then the value or the price if you will of that good falls. You just have way more supply than you have demand. Right? It is excess supply. That is where we are headed with dollars as well. That is going to cause massive problems, particularly here in the US, where we have this dollar system.
All of this may sound. Like I said, to some folks that have not really thought this through, they go “that is crazy.” That has not ever happened in my lifetime, so therefore it means it is never going to. No, I am sorry. We are not going to be afforded that luxury. We are now, as you pointed out, again these numbers are 25-cents of growth for every dollar of new debt. That is again an exponential end of the system where things get out of control. You cannot create growth and dollars fast enough to service the rapid growth of all the existing debt.
That is what the Fed has figured out. They have been lying to us now for ten years about how they have got it under control. They were going to expand the balance sheet. Remember, the balance sheet was going to be normalized, leading everybody to believe they are going to go back to a trillion or a trillion-and-a-half-dollar balance sheet. No. Actually, they told us now in March that they are going back to 3.7. That is as low as they can go. People are figuring out that the tide, if you will, is starting to now finally go out in 2019. People are figuring out, wait a second. There are some problems here. They do not have it under control. They have been flying by the seat of their pants. This has been one big experiment for the last ten or 11 years. I think that begins to accelerate this process as well. We will see that. I know we will talk about gold and silver eventually. We will see that now beginning to play out in precious metal prices, too.
Chris Martenson: I really do want to get to this idea of this monetary experiment as a way of setting us all up. Gold and silver are now a subset of this larger conversation. This is, without question as you said, the largest monetary experiment. That monetary experiment is because money is a social contract more than it is anything else. It is not real. It is an agreement we hold. It is also a social experiment. We are starting to see that social experiment fray, particularly in places that have more of a cultural history of being a little bit more alert, being a little bit more talkative and inquisitive, and also a little bit more rebellious. That would be Europe.
We see the yellow vest protesting those neoliberal policies. It is a fancy phrase for saying we are going to vacuum up all our money and give it to a very tiny elite, which they are going to hide in offshore accounts. They know no nations. They care not for your culture. They are just all about the money. Right? We are seeing that populism rise as well in Italy. It is emergent in Spain. Europe is waking up to this whole thing. I think this can be very hard for the European Central Bank to ride out again at some point and say listen. It is really at an awkward moment, but we are just going to have to make the rich even richer here for a little bit longer.
Craig Hemke: Right.
Chris Martenson: Stocks went down a little bit in price. That is getting to be a harder argument. They are working very, very hard in the United States to keep us dumbed down, distracted, and otherwise off the scent of that particular story. More people are coming to it. Really, it is that large experiment. They are so afraid.
Here is mine. Let you tell us what you think. What I think is that I have this little meme running on Twitter, which I am sure you have seen. I pump it out. I think that the markets now – equity markets in particular – are government operated utilities. I think that they are intervened in pretty regularly by, call it what you will, the Plunge Protection Team or PPT, by some combination of state and private actors. Maybe it is Citadel with Bernanke sitting in there plus the PPT plus the Federal Reserve. I do not know.
But at any rate, they are using the markets as a means of conveying a set of signals. They are so afraid of allowing it to go backwards that that is what has my attention. It is just how desperately afraid they are of seeing equity prices do what they have done through all of history, which is sometimes go up and sometimes go down.
Craig Hemke: Right.
Chris Martenson: They are so afraid of the down now. How do you interpret that? Do you agree with that? If so, how do you interpret that fear?
Craig Hemke: They cannot afford the down. That is all part of where we are now in the cycle in the process. Like I said, it is spiraling so quickly and exponentially. I think of it almost as parabolic growth of debt. You cannot afford a deflation. A stock market crash would be a deflation. That just makes the situation even worse.
You mentioned the Plunge Protection Team and the President’s Working Group on Financial Markets. Anybody can Google that term and see what we are talking about. Before we think you cannot manipulate the stock market, how are you going to buy a trillion dollars’ worth of Apple or all that kind of stuff? That is not... That betrays an understanding of how markets operate in 2019 on the New York Stock Exchange and the NASDAQ.
Anywhere from 80 to 90% of the trading volume every day is high frequency trading computers. They are trading and swapping positions at the speed of light really. They are trying to nick each other for fractions of a penny. When the trading is done by computer, then once you figure out that you can influence the trading by influencing the computers. Right?
If you can then further break that down and say okay, the buy decisions that are built into these computer programs that run everything are taking their cues largely from just a couple of different inputs. Then you can influence and reverse the market, drive the market high or whatever, just by simply affecting a few inputs. Does that all make sense? Do you see where I am going with this?
Chris Martenson: I do.
Craig Hemke: You do not have to. It does not take trillions and trillions of dollars. You are not in there buying Apple, Microsoft, and Google directly. You affect the inputs that drive the computers. Then all of the speculator money, hedge fund money, all the stuff that is out there with this high frequency trading money; they take the lead following those inputs. That is how you can get. If you think about where we were on Christmas Eve last year when the stock market was collapsing. Christmas Eve we were down 600 some odd points on the holiday shortened session.
News hits during that day that Treasury Secretary Mnuchin has called the heads of the five banks, and then is calling together the Working Group on Financial Markets for an emergency meeting on Christmas Eve night. Then lo and behold, the very next day of trading, December 26, we go up 1100 points. It was basically straight up at a 45-degree angle, which is another sign, for about the next 90 days. Now we appear to maybe have plateaued and bubble popped.
There is a reason why then this is taking place. You touched on it. This equity market, yeah. Public utility is an interesting way to put it. They cannot afford another 50% market collapse like we saw in 2001 and 2008. Why? It is because of the demographics – the Baby Boomers and all these people. Their retirement savings are either in the few remaining defined benefit plans that are in public corporations. There are certainly a whole bunch of defined benefit plans on the public side of things and on the government side. There are teachers, state employees, local, municipal employees, and all those folks.
All of those plans are grossly underfunded through years of mismanagement, and from not being funded on the front end with enough money to cover all these promises on the back end. It is kind of like Social Security on a smaller scale with each of these individual plans. They cannot afford to allow the stock market to go down. Traditional pension plans that for decades only invested in investment grade fixed income securities because they had to invest conservatively.
The Fed and the central banks have wrecked that by driving interest rates down to 0%, 1%, and even negative. These traditional pension plans have had to go out and take more and more risk shorting the VIX. All these crazy things that they are doing trying to find yield, they cannot. They just simply know they cannot afford a contraction. That is just on that side. The individual wealth of again the Baby Boomers in their peak earning years and beyond trying to save money and defined contribution plans like 401Ks and IRAs, they cannot afford the old saw about going from a 401K to a 201K. They cannot afford it either.
Again, to get to your point, that is where all of these pieces fit. Can they overcome that and keep the stock market going up by just printing enough money? They are keeping a flush amount of liquidity in there and affecting those inputs. I would not bet against them. They have been successful so far. But it is everybody else.
It is the other 90% of the US population that is speaking specifically in the US that does not have equity exposure. It is the 60% of the US population that does not even have $500 in savings. It is the 40% of the population that does not even have enough money that they cannot even get a new set of tires. They cannot afford any emergency expenses. It is those people that have just been crushed through 45 years of untethered Fiat currency. It is untethered to any sound money. You just print as much as you want. It is those folks that, as this worsens, it will be interesting to see how they respond.
Chris Martenson: Indeed, and very well said all of that. I believe there is powerful reasons and pensions among them to need to keep the whole thing going. But as they continue to pump and try and keep the whole thing going, what they have been hoping for – fingers double-crossed behind their backs – is that we would get to high productivity native organic economic growth.
Craig Hemke: Right.
Chris Martenson: It has not happened, because guess what? Incentives and human behavior are really closely linked. If you can incentivize a company to basically take no risk by buying back its shared through financial engineering and achieve the same returns as they could by taking lots of risk, by having to build new property plant equipment and all of that; what are they going to do?
Craig Hemke: Yeah right.
Chris Martenson: Well, I will take the same returns for no risk rather than all of that hard work. That is what they have done. Now here we are with records amount of corporate debt and enormous amounts of stock buyback fueling this whole thing. That is the system that, of course, if the Federal Reserve was staffed with intelligent humans who were more broadly educated than just around that narrow, I have a PhD in Economics from Princeton. Right? If they had that broader view, they would understand that you cannot run an emergency measure for ten years which has powerful incentives without warping the system. Here we are. They are afraid of having it fall.
Craig Hemke: Yeah.
Chris Martenson: I want to get your views now. If we rewind the clock a bit to 2011, remember we had gold and silver spiking. We also had oil spiking. We also had grains. We had all sorts of commodities. Everything is spiking. The Federal Reserve announces, oh my God. Things are not quite where we need them to be. We had a little stock market hiccup. They freaked out. It is 2011 again. They said QE3. This is the largest announcement of monetary printing in human history.
Craig Hemke: Yeah.
Chris Martenson: It is $85 billion a month starting immediately. What happened was, within two weeks of that we ticked the high mark in all sorts of commodities – grains, metals, oil, you name it. Right? They all started to collapse at that point in time. Also, a little-known fact for most people is the New York Federal Reserve – here is a fun fact. I love coincidences. They also had moved their trading desks from New York to Aurora, Illinois. Why? It is safe in one place. It is safe from storms. Also, it happens to be magically right next to the server farms for the Chicago Mercantile Exchange.
Craig Hemke: Yeah.
Chris Martenson: Make of that what you will. How do you interpret commodities being absolutely hammered during probably the most aggressive money printing the world has ever seen?
Craig Hemke: Oh boy, I could talk on that one for quite a long time. I do not want to inflict that on everybody listening. Let me just take one little, I guess, part of that. I cannot lay it all at the feet of the dollar. Let us just go in that direction as part of the answer. The way the dollar is currently measured, everybody has seen the purchasing power of the dollar and how it has declined since 1913 when the Federal Reserve System was initially enacted and approved. Over the past several years, it has been perceived to be stronger because the dollar is measured against all of the other Fiat currencies out there.
It becomes like a race to the bottom. If the Bank of Japan, as you mentioned earlier, is devaluing the yen faster than the dollar, then the dollar is going to appear stronger versus the yen. If the ECB is devaluing in printing more euro faster than the Fed is devaluing and printing dollars, then the dollar is going to appear stronger than the euro.
Therefore, beginning in 2013 or ’12, even though we had announced this $1.1 trillion QE3 plan, the dollar actually got stronger and started to rally. Down there, the dollar index was in the seventies back in 2011. Then all of a sudden it was in the eighties. Then all of a sudden in 2013 and ’14 it went from 80 to 100. It was not that all of a sudden there were all of these trillions and trillions of dollars that have been flooding the world. Clearly, the dollars are less valuable. No. The other Central Banks were devaluing their currency that much faster, and it appeared that the dollar was stronger.
This is all of this high frequency trading that gets out there. Again, we are trading derivative instruments. We are not trading the actual thing. We are not actually swapping physical corn and that kind of stuff to determine a price. We are trading all these derivatives. Therefore, the derivative trading seas takes a trading cue from a stronger dollar for whatever reason and however you want to interpret it. Then that trickles through. All these commodities which are priced in dollars go down in price. It is just this perversion of the system.
You know what? There is certainly an incentive for financial authorities to crack down on commodity prices to keep them in check. They do not want runaway inflation associated with their reckless monetary policies. Therefore, if you can keep input costs down of hard commodities, then you keep kind of that cost push inflation off the table. Therefore, prices stay under control. Then you can keep interest rates down if there is no runaway inflation. The Ponzi just keeps on running.
I do not know if I have answered. Like I said, we could probably talk about this subject for hours. On one level, that is how commodity prices and precious metals prices have been made to stay stable to flat down for the last six years.
Chris Martenson: I believe that that is a very good explanation. I hold a view that also says that humans respond to incentives, and there is an asymmetry in the market. I truly believe that. We will get to gold and silver in a second. Some of the price influencing, if you like that term, or manipulation – whatever term you prefer.
Craig Hemke: Yeah.
Chris Martenson: If those same influencing behaviors had been geared to the upside, we would have seen aggressive regulatory enforcement in investigations. But because they were going in the “correct direction”, nobody was too interested in looking into that.
Craig Hemke: Right.
Chris Martenson: Traders and computer algorithms being smart, they know which way the wind is blowing. They adjust accordingly. That is sort of a way of pushing ourselves into this next topic. Of course, we have to get here. That is the larger umbrella. Big monetary experiments and how do you protect yourself? I love hard assets. Gold and silver happen to be the easiest for me. Gold and silver are not one word. It is two words – gold and silver. I hold them for very different reasons. Gold is my monetary metal. Silver is my industrial metal still at this point. I know it could have monetary characteristics again at some point, but for now it is an awesome monetary story.
Let us start with silver because that is the one I am most personally excited about. This is particularly at today’s prices, which are $14.40 or something like that as we are speaking. It is way below the cost of production for a lot of the major silver miners at this point in time. You pull up the World Silver Council’s chart of supply and demand balance, and you discover that for the last ten years silver has been in a structural shortfall. I cannot find any other commodity out there which shares these characteristics. Ten years of structural shortfalls. The supplies are getting thin. It is the exact same price as it was ten years ago. It happens to have something ridiculous like 180 days of future mine supply that is currently short on the market by the big players, which puts it way above any other commodity you can find.
It is really almost like it is not just the redheaded stepchild in this story. It has special attention for punishment by somebody. That is how I have been seeing it. How do you see it?
Craig Hemke: Is that not remarkable too? I mean, you described it perfectly. Anybody could pull up those charts and show the amount of the major players – if you want to call them that on the COMEX market. The days of production that they are short of silver. It makes you wonder why. Ultimately, that is a very fun question to debate.
Chris Martenson: Yeah.
Craig Hemke: You know? It could just be simple profit motive.
Chris Martenson: Sure.
Craig Hemke: Banks love regular profits. That is what they do. You are supposed to borrow short, lend long, collect a spread, and all that kind of stuff. That is how bankers operate. If you can run a trading desk where you are consistently hedging, if you will, against your 150 million ounces that you have in the vault, you can make pretty steady profits. Right? I think there is a profit motive for the banks in doing that.
I think also too, they have the trade groups like the Silver Users Association, that love to have very low costs. If you are a user of silver, if you can keep that input cost low while you are building your solar panels or using it for all the other uses that silver has; if you can keep the silver costs low, your profit margins are wider. It is such a tiny market. I mean, it is a tiny market. If you have a billion ounces maybe floating around the world at any given time at a $14 price, that is a $14 billion market. What is the dollar volume traded in Apple every day? Right? I mean, it is just a tiny little market. It is easy to do. All those things are combined.
Then you have it priced not through the Exchange of Physical Metal but priced through the Exchange of Derivatives. They really have no link to physical metal. People are puzzled all the time about how in the world can the ratio of the price of gold to silver be 90 to 1, when historically it has always been anywhere from 10 to 15 to 1 based on the amount of physical silver allegedly in the ground versus physical gold. I will tell you why it is 90 to 1. It is because you are not pricing it off of the physical supply anymore. You are pricing it off the supply of these derivative contracts instead. If anything should tell the precious metal silver investor, or whatever you want to call it, it demonstrates how perverted this has gotten. It is that gold and silver ratio. That is how perverted the pricing system has gotten.
Our expectation – and we continue to wait for it – is a point when all of this leverage, the re-leverage, the re-hypothecated, the unallocated accounts, and all this kind of stuff – the alchemy that has been done by the banks to create all these different exposures and forms of exposure to a market rather than the market itself. Once that finally is forced to unwind, that is when things are going to get really interesting. In the meantime, everybody that bought physical gold and silver -- myself included – in 2010, 2011, and all of that; the conditions that led me to think that it was the great hedge for where we are going have not changed. In fact, as you and I have discussed, it has only gotten worse. It has only gotten more extreme. Yet, because the price has gone sideways for gold for the last six years or down whatever it is – 30% from 2011 – all of a sudden, admittedly there is an opportunity cost for the money you had or the cash you had in gold and silver over the last seven or eight years. The conditions that led you to buy them have not changed.
Now that we are at that point, like we said, where the tide of confidence in the central bankers is ebbing, we may see a runup in the dollar price again pretty soon. I mean, not other currencies around the world like the Australian dollar, Canadian dollar, the Indian rupee, the Turkish lira, or whatever. The all-time highs for gold price in those currencies are being made now. It is just that the dollar price that is not. It will be the dollar’s turn in the barrel soon enough. Hopefully that will keep people in the game. That is what I keep trying to do. It is keep reiterating that nothing has changed economically, macroeconomically, from a financial system standpoint. Those reasons that you bought metal in the first place have not changed either.
Chris Martenson: That is very well said. Of course, you do have to track the paper games and you track them closely. At this point as of today, which is here May 30, 2018, what is going on in terms of the COT report for silver? I know that the way I read it; it suggests that we have gone about as far as we are going to go in this particular slam down. What do you think of that?
Craig Hemke: Yeah. We can start with silver. It has been in decline since February 20 when we were at $16 an ounce coming off of about $14 an ounce last fall. At those lows last fall, we saw something historic happen. This is specific as we are talking to this derivative market in New York called the COMEX.
Chris Martenson: Right.
Craig Hemke: We get reports every week from the Commodity Futures Trading Commission, the CFTC. Once a week they take a snapshot. Everybody has to report their positions. Then they get grouped into categories. Typically, it is the big banks that make the markets and issue the contracts that fall into the commercial category. All of the hedge funds, trading funds, and all that stuff fall into the speculator category. Typically, the speculators are long, and the banks are short. That is how this market operates. You can predict if prices are getting ready to head low or head higher based on the relative positionings of these two groups.
Well, back last fall for the first time that anybody could ever remember, in silver the speculators and hedge funds were net short. This made many of the banks and these commercials net long. Hey, big shock then. The price then rallied from $14 up to $16 as those speculators were squeezed and the banks that were long made profits. Right? Then the positions were flipped, and the price goes back down. Now here we are again.
The report that will come out here on May 31 is going to show levels of speculator shorting that we have not seen since last fall. Here price is again about where it is last fall. We are ready for another rally. That is just as predictable as rain in May. Here comes the rally. The key then will be how hard do the banks fight to keep that rally contained? What they do not want to have then is now a new series of higher highs, building momentum, and building interest in this sector again. That is what happened in 2010 and ’11 when all of a sudden you cannot make any higher highs, more and more minimum, more and more headlines, more and more people interested in them, and all that kind of stuff. It nearly got away from them.
They will fight us again as they have since 2016 at what we call the 200 Week Moving Average of Price. It is around $16.20. They have kept a trend line in place – a downward trend line in place near there since September or so of 2016. If we can get through there, then you start getting this kind of virtuous cycle of higher highs. I suspect they will fight us again pretty hard. But the rally that will take us back up there is beginning about as you and I speak based off of that commitment of trader positioning.
In gold though, it is even more I think exciting. It is a bigger market. People recognize gold as a monetary metal. It is not just you and I, but countries and foreign central banks which are stacking it at the greatest rate since 1969. There were 650 metric tons last year as a matter of fact. We are on pace to exceed that this year. Gold is a more telling signal. It is something that we can be even more confident is heading higher.
However, since the forced breakdown through support level of $1525 in April of 2013, gold has been in a sideways range. It is roughly between about $1150 and $1350 for six freaking years, Chris.
Chris Martenson: I know.
Craig Hemke: It has put everybody to sleep. It has let everybody think gold is never going to go up and all that kind of stuff. We have already seen it once this year. Price got up to $13.60 and was forcibly reversed regardless of the news coming out of the Fed. We had this contrarian counter-intuitive move back down into the twelves. We are going back up there again. We will be fought again to get through there. It will break at some point, whether it is the economic tide going out. Like I said, the Central Bankers are being exposed, loss of faith and confidence in the Central Bankers and the dollar, political gridlock in Washington, and credit rating downgrades again because of debt ceiling debate that is going to be quite contentious this summer. All these different things are going to lead to ultimately a breakthrough of this $1360 level.
Then you start getting into a virtuous cycle of higher highs. We go, oh crap look at this. Gold is breaking out. Then you get the banks on their heels again. Then we are going to be cooking. It looks a lot like, to me, the year 2010. 2010 was a year where you could see the economy was slowing and the Fed was going to have to act. Eventually, they did. It was QE2 of November of 2010. That whole year prior to that, for the first seven or eight months of the year, prices went sideways. In fact, in the summer of 2010 gold went through a one-month drop of $100. You could have been dead right about where all this was headed in 2010, and then gotten shaken out right in the summer. Oh gosh, I guess everything is going to be fine. Then we went from $1160 to $1420 by the end of the year as QE2 was announced and that kind of stuff.
I think that is where we are headed this year. The bond market is telling me that is where we are headed. The Fed is already 50 basis points behind the curve in terms of cutting. They have to cut 50 basis points off of Fed funds just to re-establish a positive slope to the yield curve. That is coming. Once people realize it like they did in 2010 that the Fed does not have it under control, wait a second. Holy cow. We are starting to cut rates and talk about QE again. Then gold gets to $1360. You get this virtuous cycle again of higher highs. People start crowding in again.
The critical point for gold traders at this point is to try to make this happen before the proverbial train leaves the station. This is just people that are trying to protect their net worth and use gold as wealth insurance. If you have not added to your stack of physical metal that you hold in a safe, now would be a good time to do it. Otherwise, you will end up chasing, too. You will be like well it is up to 1400. I will wait until it pulls back to 1200 again like that one guy said on some site. Then it is 1500. You think, well I will wait till 1400. Your best strategy is to recognize nothing has changed.
All of this now is starting to play out, though it has taken longer to play out than we thought. It is clearly headed in a direction that you and I have discussed. Therefore, the acquisition of physical precious metal is one of your really few winning moves that you can make. If you have not added any since 2013, ’15, or something like that; now would probably be a pretty good time to do it.
Chris Martenson: Indeed. We should point out that even a post-divorce Jeff Bezos could take about 12% of his net worth and buy 100% of all the silver on the planet.
Craig Hemke: Yeah right.
Chris Martenson: It is just a way of saying once the rich get into this story, I need to remind people that the physical supply chain for silver is microscopic in terms of dollar value.
Craig Hemke: Right.
Chris Martenson: It is just tiny. You might find yourself saying silver has just reached $20. I want to get some. Your dealer says, I would love to accommodate you, but we have a four-week waiting list. Call me back.
Craig Hemke: Yeah, the premium is $5. Yeah.
Chris Martenson: Yeah, you call back in four weeks and it is $30. You are like shoot, now it is a six-week wait. Darn it.
Craig Hemke: Yeah.
Chris Martenson: You know? You will find yourself chasing that way. We have seen this over and over again. The silver market in particular is tiny. It is tiny.
Craig Hemke: Right. There are people out there saying I have heard this all before.
Chris Martenson: Yeah.
Craig Hemke: You guys have been saying this stuff since ’14, ’15, and all that stuff.
Chris Martenson: It is true.
Craig Hemke: This truly is now a unique time. We have been waiting for this moment. It looked like it was on us in ’16 when all of a sudden there were $11 trillion in negative yielding debt. The German ten-year bund was down at negative 20 basis points. There was Brexit and all that kind of stuff. Then that even subsided. The Fed started talking about rate hikes, balance sheet normalization, and stuff. All of that is now coming to an end. Even Brexit is now back in the forefront. Right? We are back up to almost $11 trillion in negative yielding debt. All of these factors are now finally combining. It is that loss of confidence that the central bankers have it under control that will trickle over into a loss of confidence with the dollar, with all the political discord, and everything else.
Then all of a sudden, all these commodities – gold and silver included – start to go up. If you were not building positions before it happened, like you said, you end up chasing. That is why people need to take heed of what you and I have been discussing. Now, if you have not followed through with any of this stuff and you have been waiting for the right time for the last six years, I think right now we really are at the right time.
Chris Martenson: That is fantastic. That is very well said. I know you are running short on time, but I have to squeeze this last one in.
Craig Hemke: Sure.
Chris Martenson: I was really surprised. Ronan Manly put out this piece where the London LTC market got exposed a little bit because the LVMA said we are going to show you some actual volume data. What surprised me was finding out that physical silver – this is the London OTC market – they reportedly traded an average of 359 million ounces a day on the London OTC market. This was on each of five days during November. They opened the kimono and said, let us show you a little bit of trading data. Is this not exciting? My eyes popped. I was like, how is that possible?
Craig Hemke: Right. Right. It is possible because it is all unallocated metal. Andrew McGuire has told me this before. He has been in the LVMA vaults. It is as simple as a spray painted or taped blue line on the vault floor. A forklift comes in and lifts a pallet, and just moves it from one side of the blue line to the other. That sounds preposterous. He has seen it done, and that is how you do it. You have unallocated metal. You have this phony bologna plastic banana derivative market setting the price. They just swap positions back and forth. There is very little actually allocated physical metal that ever changes hands.
That is the scam of the whole system. It is set up by the banks. It was put forth in 1975 as a way to divert physical demand. All the wikileak cables are out there now of the plan that was devised in 1974 to do that. People think gold price manipulation is conspiracy theory. No. It is actually historical fact. It has been managed through physical supply in the fifties. There were massive hearings on Capitol Hill because the US lost 25% of their gold reserves in two years.
Then they put together the Gold Pool, which was a collection of the US and seven other countries pledging physical gold to try to manage price at $35 an ounce to peg. That finally was blown to smithereens in ’68. The run on US gold got so severe that Nixon had to close the gold window in August 1971. We have been untethered ever since. That is when income and equality, and wealth and equality began to explode in the US. It all traces back to that. The banks and the central bankers have been able to shun demand for physical metal by creating all these different derivative and unallocated forms. People think they own gold. They think they have a claim on gold. Come back in 90 days and you can have it.
When all of this, which is the exact same parabolic exponential growth of all these claims, is the same way that the debt has blown up the same way. When they all finally comes to an end, the music stops, and people show up and say I have this thing here that says I have 100 ounces of gold; they say, I am sorry. You do not. You never did. Read the fine print. We will give you some Fiat for it, but you cannot have gold. Then all of a sudden, again, the whole scheme is exposed. The price that is then determined and discovered through the actual trading of physical metal – not this phony bologna stuff – Chris, I am not sure what that price will be. I do not know how many ounces are out there. Price is ounces per unit of currency. I do not know how many ounces will be available, so I cannot tell you what that price will be. All I can tell you is it is not going to be $1285 an ounce.
Chris Martenson: I totally agree. It has just been mysterious to watch a lot of smoke out here. Of course, you can go online, and you can find plans for a nuclear bomb easier than you can find out how much fully allocated gold is actually held by central banks.
Craig Hemke: Right.
Chris Martenson: You have your smoke. Right? The bank says we would like some of our gold back. The Fed says, oh it is going to be so hard logistically. We do not know how we would get it to you.
Craig Hemke: Right.
Chris Martenson: I am like FedEx tomorrow. I do not know. Whatever. It is going to be interesting to see what happens when that finally gets peeled back. I cannot wait to see that and watch that. I know you have to run, so I am going to let you go here. I am going to let people know they can follow you on Twitter @TFMetals – that is the handle.
Craig Hemke: Yeah.
Chris Martenson: It is @TFMetals. Also, go to TFMetalsReport.com. Tell people what they can find there and your service.
Craig Hemke: We factor all of this into the analysis that we do every day. First and foremost, it is a great community. It is people from all political stripes and from all around the world. They recognize we are all in the same boat, and we try to help each other to understand, prepare, post links, uncover this and that, and keep us all informed.
What I do on a daily basis for this is a whopping $12 a month. I just tell people what I think the banks are doing and how that is going to impact price. As you are accumulating metal, if I can save you a buck or two here whereas you are buying physical gold and silver, I mean it certainly pays for the $12 a month. I think there is value there as well. Again, it is all. Anybody can find it. It is TFMetalsReport.com.
Chris Martenson: Thank you so much for that. Thank you for your time, your outlook, and your expertise here today. Craig, all the best. I cannot wait to have another discussion in the future.
Craig Hemke: Thank you, Chris. Please keep doing what you are doing. Your services are invaluable.
Chris Martenson: Thank you.