Gold & Silver to Head Dramatically Higher, Mirroring Palladium / Commodities / Gold & Silver 2019
Mike Gleason: It is my privilege now to welcome in David Jensenof Jensen Strategic and a highly studied mining analyst and precious metalsexpert with close to two decades of experience in the mining industry. And it'sgreat to have him back on with us.
David, thanks so much for thetime again today, and it's nice to talk to you again. Welcome.
David Jensen: Thank you, Mike. It's good to be back with youagain.
Mike Gleason: Well, David, we had you back on at the beginning ofthe year and you shared some amazing insights on palladium, and we'll get tothat in a bit because that market is still very interesting. But first off,you've been watching the Fed balance sheet closely here and I wanted to getyour comments about that to begin with. Now, after the extraordinary expansion,which followed the 2008 financial crisis and a few rounds of QE, the Fed begancontracting the money supply in 2017. You've been making the case that thewithdrawal of liquidity could trigger another catastrophe.
So, let's start with the basicshere. If you would, please explain the history of the Fed's balance sheet, andwhy it is something investors should be carefully watching.
David Jensen: Yeah, I think that the root of it all, the reasonwe're watching so closely is the tremendous imbalance between the amount ofcash, liquid cash that's in the system versus the amount of debt. And the Fedhas run interest rates from around 20% in 1980 down to 0% or 0.25% here acouple of years ago. And what they've done is expanded the greatest debt bubblein history. The total debt in the U.S., now on all levels according to theFed's flow of funds report is about $72 trillion. And to serve as that $72trillion of debt that's in extent, there's only $14 trillion of liquid currencyin deposits and in physical cash. So, what we're seeing now is that the Fedneeds to continually to expand the money stock with the money supply. The moneysupply is the annual change or the addition to the outstanding money stockedaddition to the $14 trillion that's out every year. And they need to add asubstantial amount so that the debt can be serviced and so that the economy cancontinue to move forward.
And what they've done in thelast three years, since Q1 2017, they've contracted the money supply, which is,again, the year over year change, they've decreased that increase down to about3% from roughly about 11% in Q4 2016. So really a precipitous drop.
And so what we're seeing nowis that the rise of the interest rates and the, and the cutoff of the moneysupply, they've basically withdrawn about a one and a half trillion dollars ofadditional liquidity, which would be here if it continued to run it at the samerun rate as in Q4 2016. So, they've withdrawn or tightened a substantialamount. And as interest rates go up, it also, over time, generates a need forabout another $2 trillion per annum in interest payments. So what they've doneis they've really created a liquidity crisis here in the market. There's notenough money to pay the debt that's outstanding. And, of course, the mostlevered or the most unstable borrowers show the distress first when thesethings happen. And that's what we saw in the repo market here in September, wasthat that market started to seize up because the capital wasn't there to meetthe needs.
Mike Gleason: Kind of leads me right into my next question. TheFed has really been pumping lots and lots of money into that repo market andthey've extended it multiple times. You see this intervention in the repomarkets as the “first domino to fall," and what might be the nextfinancial crisis. The Fed, is as usual, not bothering to explain itself, but weknow that, we're pretty sure, that it isn't good. Give us some more of yourinsights on that repo market intervention and why it could be the signal oflarger troubles ahead.
David Jensen: Yeah, it's a signal of illiquidity in the financialmarket. So any borrower of size, a hedge fund or a money manager, a bank canstep into that market and borrow in that market in return for providingcollateral, whether it's a treasury or some other type of security. And thatmarket basically dried up because the liquidity was not there, it wasn'tavailable. But the issue that I really see is at the core of this, is thatleverage loan market, which is the most highly indebted borrowers. And thatmarket collapsed in Q1 2008 and kicked off the great financial crisis. And thatmarket, now, there's a tremendous decay in the credit worthiness of theborrowers in that market. So we're seeing the signs here that there's acollapse in the credit worthiness of the most highly leveraged in society.
And just to give you a senseof the repo market, Mike, it's about a $5 trillion market and about three and ahalf to $4 trillion of that rolls on a nightly basis. So they're just 24 hourloans. So any kind of a seizure in that market can cause great problems in thefinancial markets as a whole. But the greater question is, is why is thismarket seizing up to begin with? What is the problem here? And the problem thatI maintain is this continual drying out of the economy and taking awayliquidity from the economy that's gone on ever since the beginning of 2017.
Mike Gleason: So, the Fed's created a problem by contracting themoney supply. Is there any chance that this sudden about-face, the repo marketinterventions and the new bond purchase program, that we're not supposed tocall Kiwi four, by the way, will that be enough to prevent disaster, David?
David Jensen: Well, you're talking about a net shortfall that'soccurred now in the order of trillions of dollars. And it takes years formonetary policy changes to impact the economy as a whole. So, you've got manytrillions and it has to basically infiltrate the economy, the money expansionas it occurs has to disperse throughout the economy and be utilized. And we'reat the point now where so many of the unstable bubble activities have beentripped out. I believe that they're not going to be able to address this withmonetary policy, it just takes too long and the drying out of the economy ofmonetary liquidity has gone on for too long to date. The damage is alreadydone.
Mike Gleason: Yeah, we would agree. It's going to be interestingto watch things continue to unfold there, but we know that we don't know thefull story, I think, when it comes to all this repo market stuff.
Well, turning to palladiumnow, we had you on back in January of this year. And we spoke quite a bit aboutthe palladium situation. At the time, there was a major supply shortage in thatmarket and since then, things haven't changed too much and we've seen the priceof palladium go from a little over $1,300 back in January to nearly $1,800 heretoday. So what's the latest on palladium and why have we seen this amazingresilience? Because not many in the metals community would have expected themeteoric rise to continue and then see it remain so firm and never really showsigns of cracking or experiencing any real pullback, to speak of. So what's goingon with palladium now, David?
David Jensen: Well, it's a good old fashioned shortage. Theconundrum or the question is, why is there a metal shortage when the autoindustry is in free fall? About 80% of palladium is used in catalyticconverters in automobiles. And you would think that the demand would declinealong with the production of autos. But I think there's another dynamic at playhere, is that the Eurozone have been practicing very loose monetary policies,as many of the banks around the world. And I think that at the margins, theseare very small markets compared to the amount of capital out there. All thegold in the world is worth just one or 2% of the total capital markets outthere. So, what we're seeing now with palladium, which is a fraction of thesize of the gold market, I mean, the above ground stocks are nothing andannual production is in the order of about a 10th of the amountof gold.
But I think what's happeninghere that's driving the shortage, and since we talked in January, the leaserates have started to spike up again. We're now seeing the lease rates, onaverage, in and around the 8% level. So in London where this metal is tradedand where there's actual delivery of metal, is insufficient metal there to meetthe market demand. But I think that there's demand, it's not just auto demandthat's out there. I think that if you look back in 2016, the German governmentwent negative with the bunds there for the first time, the market did. And Ithink what you have is just that at the margins, enough investors start to buyreal assets, including these intrinsically valuable assets like palladium and platinum, gold and silver.
But that the palladium marketwas already tight to begin with. We’d run over two years there where there wasvisible shortage and lease rate spikes in the market. The gold, silver,platinum, palladium market, they all trade promissory notes, not the metal. So,the pricing can be anywhere. But when you have metal shortages, with palladium,you can't manipulate the market with paper anymore. You try to sell a load ofpaper, a promissory note as these spot contracts are these unallocated spotcontracts. When you have physical metal shortage, those that you've sold thecontracts to say, "Okay, we'd like to take delivery of the bars now."And you have a default situation arising.
So the games can't be playedin the market when you have shortage as you do with rhodium, which is a sister metal. It's not traded onexchanges, same applications as a palladium. It's gone up nine times now in thelast three years and palladium has roughly tripled in price. So, there's beenreally tremendous price moves here, driven by good old-fashioned supply anddemand dynamics. Pushing aside paper pricing, using these unallocatedpromissory notes in the COMEX and especially in London, which is the primaryphysical exchange.
Mike Gleason: So, how might all this affect gold and silver,which are obviously the much bigger markets and the precious metals that mostof us pay more attention to. What kind of spillover effect might the situationin palladium have on the money metals? And what can we portend, potentially, asthis relates to gold and silver?
David Jensen: Well, the, the spillover effect, I think, reallycomes from the central banks. They've run monetary policy now that has been, Ithink, wild is the kindest way to describe it, over the last 50 yearsespecially. But they've run the debt market up so high and the bond market upso high. And this monetary inflation has been parked in these financialmarkets, especially in the bond markets. Now, what the Fed has done by chokingoff the money supply, they've, in essence, lit a fire in the bond market.Because when you trip the economy into a gross contraction, what happens isthat you run enormous deficits. And in the end, you will not be able to havethe demand in the market for the treasuries or whatever government securitythat you're selling, and it leads to financing just by monetizing the debt.
So in essence, Mike, thedemand comes from the central bank money supply or looseness of their monetarypolicy. It's hidden for a very long time because the financial markets climb.They get their rulers out and they project for decades how high they’ll go. Buteventually, you get to the point where you can't stimulate the markets higheranymore because of the tremendous distortion built into the economy.
And as I maintain, really thecrisis that we're going to have now from the credit limitation that's gone onfor the last three years here. So, those holding the paper assets like bondsand other securities see that we're in for a growth slowdown with even moregross money printing by the central banks. And that's when you start seeing themovement from the paper holders into real assets of intrinsic value. And Ithink, then, what you have is just a tremendous vault in the price of thesemetals. But I think it will probably lead to some sort of a of a dislocation atthese exchanges, which are so heavily papered and have only a tiny fraction ofthe amount of metal there for the number of contracts which are held in thespot markets there.
Mike Gleason: Yeah. Obviously the palladium market seems to be amarket right now where supply and demand fundamentals do exist and it's drivingthe price. And wouldn't it be something if maybe that finally happened withsilver, which unfortunately can be pushed around with all the paper that theyseem to create there.
David Jensen: It will come. It will come to the silver market.It'll come to the platinum and gold market. It just takes a little bit longerbecause they're not quite as tight as the palladium market.
Mike Gleason: Well finally, David, as we begin to wrap up, giveus an early 2020 outlook, if you would, what kind of a year do you expect it tobe in the markets and the metals, specifically? And then also comment onanything else that you’re going to be watching most closely as you continue toanalyze the state of the financial world.
David Jensen: Yeah. Well, I mean anything can happen in themetals market in terms of price wise. But at some point, the basic papering ofthe market is going to fail. Now people have been calling for that for decades.But I do think, Mike, what's very different here is the fact that the Fed hasacted as radically as it has over the last three years in contracting the moneysupply to the level that is well known to have caused the prior three crises.And if your listeners go to ;@RealDavidJensen on Twitter, the first thing that's posted in thereas a chart of the money supply, how that's contracted and how that led to crisesthe last three times. So my sense is that we're going to have a breakage atsome point in these markets and the printing is going to be enormous. But alsothat there'll be a sizeable amount of chaos and carnage.
So not good news. The lastthing you want is metals to go up because you have a tremendous crisis on yourhands. But I think that's what the Fed really has created here. The narrativethat we're getting from the financial media is that it's about Trump and trade.And so many of the comments are about Trump this and Trump that. And really,the core of it all, the essence of it all is the central bank, the failure ofmoney, money printing, and the failure of using dilution of currency as a wayto “stimulate” your economy. It's never worked. It's a complete fraud the waythese systems are run and it's time for a new monetary system.
Mike Gleason: Yeah, I couldn't agree more and very well put. Thenext several years, figure to be very, very interesting, indeed. And we'll seehow will that all transpires and unfolds and look forward to having you back onto dissect it more. We'll leave it there for today.
I thank you very much foryour time and for coming back on and for sharing your insights. And I lookforward to talking to you again down the road. Have a great weekend and takecare, David.
David Jensen: Thanks Mike. It was my pleasure.
Mike Gleason: Well that will do it for this week. Thanks again toDavid Jensen of Jensen Strategic. You can follow David on Twitter @RealDavidJensen, be sure to check that out.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2019 Mike Gleason - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.