Craig Hemke: Silver To Continue Lagging Gold, Will Struggle To Overcome $17

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.

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