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Futures Market Failure to Someday Trigger Run on Gold/Silver
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Mike Gleason: It is my privilege now to welcome in Bill Holter of JSMineset and the Holter-Sinclair Collaboration. Since leaving Wall Street more than a decade ago, Bill has made a name for himself as an astute and highly respected market commentator, writer and has teamed up with Jim Sinclair to help others discover the inherent dangers of our debt based economy and how to protect yourself against it.
Bill, it’s great to have you back and I very much appreciate the time today. Welcome.
Bill Holter: Thanks for having me, Mike.
Mike Gleason: Well Bill, let’s talk for a minute about what the Fed has been up to. They announced some intervention in the repo markets late last month. The program was initially sold as something very short term, there was absolutely nothing to worry about. Now that program has been extended through at least January and the Fed is seeing daily demand for short-term loans of $50 to $80 billion. Again, that’s per day. We know lying is part of the job description at the Fed. It sure seems like something serious is going on when banks start charging one another huge interest rates, or stopped doing this short term, fully collateralized lending altogether. Something is definitely rotten, but the markets aren’t really reacting. There isn’t that much talk about it in the financial press. What is your best guess about why the Fed has had to step in there with hundreds of billions of dollars? Are they bailing out Deutsche bank, another bank? What’s happening here?
Bill Holter: Well, we don’t know for sure what bank it is. Basically something has broken in the plumbing system or the background, whatever you want to call it. And the result is banks don’t trust each other. There’s demand from a bank or a group of banks that need capital overnight. The reason banks need capital overnight is because they carry positions, if you want to call it the carry trade. They carry positions overnight. They have to finance it. And what’s happened is from bank to bank, there’s a lack of confidence and banks are balking at lending to each other and there you have the rate going higher.
Mike Gleason: On top of the hundreds of billions being pumped into the repo markets, the Fed just announced another 60 billion per month in treasury notes. They haven’t come up with a clever name for this quote new program yet, but we definitely aren’t supposed to call it QE.
Bill Holter: Right, it’s not QE.
Mike Gleason: We’re told this is also just a routine preventative measure, nothing to see here. Well they can say what they want, but one thing should be clear our markets are hopelessly addicted to Fed stimulus. We’ve definitely learned that over the last several years. Quantitative tightening has failed, and the Fed isn’t going to be able to normalize interest rates. The question is how goofy things will get now. They printed a few trillion dollars last time and didn’t get all that much economic growth. What will it be this time, do you think? $10 trillion in bond purchases? Will they finally resort to dropping money from helicopters as Ben Bernanke once suggested? What do you think?
Bill Holter: I have no idea what the number is going to be, but what this basically means is the real economy is not generating enough cashflow to support the financial economy and the Fed by doing QE, by shoving liquidity into the system is trying to make up for the gap that is not being created by the real economy. It shows you; I think the best way to look at it is the financial system is a patient on life support and the central banks, the Fed, the ECB, Bank of Japan, they’re all acting as life support for the financial markets, which without the central banks, the financial markets would basically just, the tents would fold up.
Mike Gleason: Has it surprised you how little response there’s been in the markets in terms of investors showing signs of worry? It’s really quite amazing to us that we haven’t seen this become a bigger story. Did you see it the same way?
Bill Holter: Yeah, I agree wholeheartedly. It’s amazing. I mean the very first day I heard that they had to do overnight repos. It raised eyebrows and then it was day after day and now it’s we’re weeks into it. It tells me something is broken and it’s shocking that nobody cares.
Mike Gleason: Thus far metals markets haven’t responded to the Feds new measures either and the prospects for even more rate cuts. We’re well below the highest put in over the summer. In fact, most of the markets that seem to have met the news of extraordinary measures with a collective shrug, as we just talked about. Stocks have moved a bit higher; 10 year bond yields are actually moving higher as well. The dollar hasn’t done much. What do you make of the market’s response? Talk about metals specifically, you would think that they would maybe be getting a little bit more of a safe haven bid. You almost have to wonder at this point what it will take to rattle investors. Are these markets so tightly controlled now that fundamentals have stopped mattering all together?
Bill Holter: I think that’s right. I think fundamentals they matter less today than at any point in the past. Yes, we should have seen a movement higher in the metals, but rallies have been met with paper. If you look at the big up days, the open interest explodes on up days and that’s not so much from the buy side. That’s the short side meeting the demand with paper as opposed to meeting it with metal.
Mike Gleason: Obviously, the metals investors have been frustrated for a long time. You see this, so you think you’re going to get some kind of a market reaction. You certainly think gold and silver should be getting more of a pop. What does that say to you in terms of the fundamentals? Obviously fundamentals may not have the impact that they once had. Eventually, will they? I mean how does the story end and how does somebody who sees all of these black swans and has so much concern about what’s going on in the financial system and their angling and positioning themselves for all of that risk, how do they benefit in the long run or do they?
Bill Holter: Well, you asked how it ends it. I’m convinced that it ends in a failure to deliver, whether it be out of COMAX or LBMA or wherever. There’s going to be a failure to deliver because there’s more demand than there is global production and the demand for years and years has been met from already mined and hoarded gold that’s leaked into the market as a salve if you will for the price. It seems to me… we’re here in North America, the little guy is burned out. The little guy for really the last year or so in North America has been a seller. There’s not been big demand and that tells me that the average retail person has just thrown up their hands and is surrendering and liquidating… everyone else is making money in the market, so I might as well put my money in the market, which is a huge mistake.
Because once the unwind really begins, it’ll be like a light switch. At some point in time I’m convinced that you’re not going to be able to source gold or silver for fiat. Now you’ll be able to trade gold for silver or silver for gold or gold and silver for something real, but I think metal is going to go into hiding and you’re not going to be able to buy it anywhere near current levels and there will be a point in time I think that you won’t be able to buy metals or source metals at all for fiat until the smoke clears.
Mike Gleason: Yeah. That’s one thing we’ve always said in the metals markets. I mean when you really look at the overall participation among the buying public throughout the world, it is such a small percentage and if we just go from say 1% ownership, whatever it is, it’s a very small fraction.
Bill Holter: I think that’s high to begin with. I think 1% is high, I think it’s under 1%.
Mike Gleason: Yeah. If we just see like a doubling of that or a tripling even in a black swan type of scenario, there’s just not that much metal out there, Bill.
Bill Holter: Right. It’s a supply and demand equation and you know, often people say, “Oh, well you can’t go to a gold standard because there’s not enough gold.” Well, that’s true at current prices, but you markup gold to $10,000, $25,000, pick a number at some number there’s enough gold and that’s where we’re headed is to wherever that clearing number is.
Mike Gleason: Certainly presidential politics are going to be a big story in the year ahead. We’ve got quite the slate of socialists running for the Democratic nomination. In normal times, you would think that the nomination of someone like Elizabeth Warren would mean limit down in the stock markets the next day, but these are hardly normal times. The only thing we can be pretty sure about is that the battle to defeat Trump is going to shift into even higher gear, if that’s even possible. Talk about some of the implications you see for the markets based on the political theater over the next 12 months?
Bill Holter: Well, obviously the next 12 months is going to be a circus. From the left, it’s nothing but impeachment and I actually watched about 10 minutes of the debate last night. It was the first one I watched, and I just turned it off. I mean, you’re talking about blatant socialism, communism, whatever you want to call it, which is an abject failure. If one of the 12 that… well, let’s leave Tulsi Gabbard out of it… but if one of the remaining 11 does become president, it’s pretty much over because you’re looking at income redistribution as opposed to capital formation. We’ll go through a phase of total capital destruction as opposed to what capitalism is which is capital formation.
Mike Gleason: Do you see any real possibility that that could happen? Obviously these are fringe candidates for the most part. Usually when you get to the general election, they’ll come back to center and try to get those moderate voters to swing their way. But is it really just going to come down to the economy? People will vote with their wallets. If the economy is going to remain in a kind of similar spot that it’s in now, 12 months from now, then Trump’s probably fine, but if we go off the proverbial cliff, then he’s in trouble. Is that kind of how you’re viewing it?
Bill Holter: When President Trump back in 2017 started taking ownership of the stock market, I wrote and had done interviews saying that that was very, very dangerous. He should not take ownership of the stock market simply because within the four years I didn’t see even a possibility that it could be held together. So here we are, not quite three years, we’ve got another year to go. Yeah, I do see that as a danger. I’m also on record as saying that none of the current candidates from the left will be the eventual nominee. I think someone else is going to come in. If I had to guess, it might be Michelle Obama. That’s just a wild dart right there, but I don’t think that any of the current candidates will be the nominee.
Mike Gleason: Yeah, interesting theory. I’ve seen that elsewhere. Michael Bloomberg I know is as a name that some people have thrown around too. But yeah, it’ll be a very interesting theater for sure.
Well, Bill, before we go, I want to ask you to comment on any of the other stories you think investors need to be watching here and then also comment if you would, on whether any of the recent market reaction to everything we’ve just been talking about here today, perhaps has made you rethink your belief about the importance of owning precious metals or has it given you more conviction about that? Give us your thoughts about any or all of that as we wrap up today, if you would.
Bill Holter: Market action, well, you’re always rethinking. I mean you come to a conclusion and then you try to break your conclusion. You come at it from a hundred different angles and I’ve done that over years and years and mathematically, pure logic says that if they’re printing paper for free, it doesn’t have any value. And if they’re digging gold and silver up out of the ground and it takes capital, labor and equipment to do that, it has value. My premise for years now has been this is a credit problem. It’s a credit bubble that has been created over, well literally over my lifetime since 1960 say. The world runs on credit and I actually started writing a short article, What if Everyone’s Credit is Ruined. And that’s what I think is going to happen.
I think you’re going to see a credit event where credit basically ceases because you have distrust from counterparty to counterparty and you get a disruption in credit and then our everyday life is disrupted. I’ve said this probably, gosh, I don’t know, 50 or a hundred times in interviews and articles that if there’s an interruption in credit, you’re going to go to Walmart and find that if it is open, there’s nothing on the shelves because there’s not little elves in the back room that make loaves of bread or shoes or whatever. For a loaf of bread, there’s like seven or eight uses of credit from the wheat field to the shelf. And if any of those instances of credit get shut off, the loaf of bread doesn’t make it to the store. So, I think that’s the most significant thing that people just don’t think about it because your everyday life, “Oh, well I need this, or I need that. I’ll go down to my store or go online and order it, whatever.” But shipping, trucking, distribution, all of that, will stop with a credit implosion and that’s where mathematically we’re headed.
Mike Gleason: Yeah. And at the end of the day, if you look at precious metals, it is like a form of insurance more so than it is an investment per se.
Bill Holter: Well, they’re not credit, gold and silver are no one’s liability. They’re not a promise. Everything else is a promise. Gold and silver are merely proof that capital, labor and equipment have already been expended, so they’re pure assets. They’re pure money.
Mike Gleason: Yeah, that’s a great way of summarizing that, very, very well stated. Well Bill thanks so much for your time, enjoyed visiting with you and I certainly hope we can do it again before much longer, great insights as usual from you and we appreciate the time. Thanks for coming on and all the best to you.
Bill Holter: Appreciate it. Thanks Mike.
Mike Gleason: Well, that will do it for this week. Thanks again to Bill Holter. The site is JSmineset.com, be sure to check out all the great commentary that Bill and Jim put out there on a regular basis. Again, JSmineset.com.
Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.
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