Listen to the Podcast Audio: Click Here

Mike Gleason: It is my privilege now to welcome in Craig Hemke of the TF Metals Report. Craig runs one of the most highly respected and well-known websites in the entire industry and has been covering the precious metals for a decade now, and he puts out some of the best analysis on banking schemes, the flaws of Keynesian economics, and evidence of manipulation in the gold and silver markets.

Craig, it's been entirely too long. Thanks for joining us again, and how are you my friend?

Craig Hemke: Oh, Mike, it's always a pleasure. Thank you for having me back on. I'm a little more grayer, more wrinkles, all that kind of stuff in the last time since we've spoken, but that's what these markets will do to you, that's for sure.

Mike Gleason: Yeah, certainly do. Craig, we know that you've been covering this rally in the dollar closely over the past 3 weeks. I wanted to kind of start there. The problem is, in the short run, nobody in the markets really cares about the dollar's value relative to what it can actually buy. Traders simply care about how it's performing in foreign exchange, paired against some other national currencies, and the dollar has been strengthening against the euro and the yen. But, with that said, you definitely can't take a dollar and buy more stuff today than you could, say, 3 weeks ago. In fact, it takes more dollars to buy a barrel of crude oil than it did last month. People still figure the CPI basket of goods will cost 2 to 3% more a year from now. Some of us figure inflation has been, and will be, a lot higher than that.

In a minute, we'd like to get your take on whether the rally in the dollar is likely to persist a while longer. But before we get into where the dollar is headed, help us out here, because as we're seeing the dollar getting stronger against paper currencies, and that seems to be all anyone wants to talk about, but meanwhile, the dollar is getting weaker when you look at it compared to the stuff we actually need to buy, like crude oil, for instance, and there are other examples as well. So, explain this to us, if you can, because it appears to us that everyone is focusing on the wrong thing here, Craig.

Craig Hemke: Well, that's always the case it seems like, Mike. Actually, everybody's probably seen those charts going back to 1913, when we instituted the Federal Reserve and the value of the dollar has declined by 98%, or something like that. Really, the pain for the regular, average, everyday American began in 1971 when Nixon suspended, as they say, the convertibility of the dollar into gold. And that's when the U.S. government, the Treasury, the Fed, went off the rails, began printing currency in their effort to fund both guns and butter, if you will, in the traditional Keynesian sense. All the social programs, all the wars, everything else, all the accumulated debt, and it's at that point that, again, things began to get out of hand.

And it is at that point, you can trace it back, to that's when the standard of living, for every American citizen, really began to decline. It's why my generation, your generation, Mike, everybody has such a much more difficult time making ends meet than, maybe, our parents had. Because not only is it food costs, it's taxes, it's education costs, it's everything that goes with it, and it's because of this incredible devaluation of the currency.

What do you mean by devaluation of the currency? Look, anybody understands, even if you didn't take Econ 101, you know supply and demand, right? And if you increase the supply of a certain item you're, by very definition, devaluing the existing supply of that item. It just makes it less valuable if there's more and more of it, by any, again, by any sense of the imagination. And so, therefore, all of this money printing, all of the trillions of dollars of TARP, and QE, and everything else, has just continued to destroy, really everybody outside of about the top 10% of income earners in the U.S., and sadly, that's a path that we continue to go down.

Mike Gleason: Yeah, certainly the wealth gap gets bigger and bigger, the more inflation we get, that's for sure.

Now, let's talk for a minute about what you're expecting from the dollar, just if we get back to how it's going to relate to other fiat currencies over the short run, and give us a guess on where the DXY index might be by years end. Has the trend lower that began a year and a half ago been broken?

Craig Hemke: Oh, man, I'll tell you what. When you get a move like we've had in the last 4 weeks, it can really shake your core beliefs pretty hard. But, I'm standing by it. I've had the core beliefs, really, ever since election night of Donald Trump. We were sold this bill of goods about, you know, because if you remember, Trump was going to be horrible for the markets, right? And then as soon as he was elected, we had this bill of goods shoved down our throat. We call it the narrative of 2017, you know, oh no, this was going to be great! The dollar was going to soar, and interest rates were going to skyrocket, and all this kind of jazz. And we said, you know, I don't buy it.

And, of course, the dollar index peaked about the first trading day of January 2017, up at about 104, and then fell last year, all the way down to 91, finished up the year at about 93, and then fell again in January, now it's back to about 93. I still think it's going lower this year. I think the breakout in the long-term charts of crude oil, as you mentioned, crude oil now at the highest it's been since December of 2014. You see it in copper, you see really all the commodity markets turning. They are telling you that there's more dollar weakness to come, not dollar strength.

And when we look at just the chart of the dollar itself, I still think that means we're going below 85 this year. That would be a pretty significant move from here, and we've only got 7 months left, but I still think we're down maybe another 10% this year. And at the end of the day, you probably remember the old adage about don't fight the Fed, and that had to do with interest rates. I think, at this point, you don't want to fight the Fed, and you don't want to fight the White House because the two of them, combined, both want a weaker dollar. In that the Fed, in their classical Keynesian sense, thinks that a weaker dollar is good, and it might inspire what we call cost push inflation, where the input costs go up and that pushes inflation higher. And the Fed, obviously, trying to spark inflation so that they can continue on the path of higher interest rates for their banks. So, the Fed wants a weaker dollar and, obviously, Trump and the Trump administration have indicated, from time to time, over the last 12 months, that they prefer a weaker dollar as well.

So, I think we've had a rally over the last 4 weeks from deeply oversold conditions and some massive short positions that were built up. That was due to break, and you've had this sharp rally, but now, you pull up a chart of the dollar, and as you can see, it is extremely overbought. Momentum indicators are at the most overbought we've seen in at least a couple of years, going back probably to 2016. And now we just need it to roll over. Eventually it will, and then we'll just see if I'm right about where we finish up the year.

Mike Gleason: So, we've talked about the dollar rally that's certainly driven the recent correction in gold and silver prices, but frankly, it could be worse. As of this recording, as we're talking here mid-day on Wednesday, gold is still holding above $1,300. My guest last week, Greg Weldon of Weldon Financial, made the point that the dollar's breaking out much more so than gold is breaking down, something he viewed as constructive for the yellow metal. So, it seems like the shorts haven't been able to fully capitalize on the situation. Do you have any thoughts about the resilience (in gold) we're seeing here?

Craig Hemke: I think it more than anything, Mike, it has to do with the internal structures of that COMEX market, because no doubt, it's the COMEX market that sets the price. It's the futures that, they're the tail that wag the spot dog and the futures market, I mean, the demand for that COMEX gold exposure, which is really all it is, it's not gold itself, it's just demand for gold exposure. It ebbs and flows, and wanes and grows, based upon things that drive the machines to buy that exposure. And one of the big things that moves those machines to buy or sell COMEX gold and silver, is the level of the dollar, and the level of interest rates. So, the dollar rising has forced some selling, really computer algorithm driven selling, in both gold and silver.

But, specifically within that COMEX market, those of us that follow these markets know that it's a real clear trend indicator is the ebbing and flowing, if you will, of the speculator positions within those markets. And by speculator, I mean the big managed-money funds, and the hedge funds, and the technical trading funds that are out there. They seem to buy gold when the dollar's declining, when price is above the 200-day moving average, technical indicators, things like that. And then they dump it right back when the trend is the other way.

Well, if you follow these markets, you know there's a report that the CFTC puts out every week called the Commitment of Traders, where they survey every bank, every hedge fund, every brokerage firm, for their positions every Tuesday, and then you get kind of a summary report on every Friday. Historically, if the speculators get really, really long, say in gold, holding a net position of say, 300,000 contracts long. Then you know that, oh boy, price is going to roll over. If anything, you know, even taking the manipulation out of it, if anything, just because every speculator in the world that was going to buy, has bought. And eventually, the market tips over, runs out of momentum, and there's more sellers than buyers and down it goes.

Well, the thing in the gold market at this point, the thing that's keeping it up, is that that large speculator, the hedge fund, whatever you want to call it, position is only about 100,000 contracts net long. And so, the example is, at tops, everybody that has bought, has already bought and it runs out of momentum on the upside. In this case, we're pretty close to having everyone who's going to sell, has sold. And that's clearly the case in silver. Silver is in a historic position. Historic in the sense that we've never seen it like this before. The big funds, the hedge funds, what we would call the large speculators in silver are actually already short. And so, again, if that market tops, we can all recognize the dying of momentum and eventually get more sellers than buyers. Silver in particular, but gold as well, were in a kind of a bottom where there's just more buyers than sellers. Everybody that's going to sell, has already sold. And I think that's a big part of that divergence that you mentioned that your guest last week talked about, about hey, “gold's holding in there pretty well.” Well, that's because internally, within that market, there's just not as many active sellers as there would be if positions were more oriented toward the long side.

Mike Gleason: Switching gears here a bit. At TF Metals, you like to keep your eye on geopolitical events as well as the metals markets, and there can be plenty of overlap. Metals prices can be sensitive to major world events, though lately, it seems like people are worn out and paying less attention. Nevertheless, we live in tumultuous times and the world is going to likely be a very different place 10 to 20 years from now. While we're sympathetic to folks who are tired of watching the geopolitical chess match that's been going on, people really do need to be paying attention, and not just because their investments are at stake. Now I know you've been watching developments closely in the Middle East, in particular. The President just withdrew from the nuclear deal with Iran in part because Israel objected to it, and it looks like Israel wants to fight. Is the US going to wind up right in the middle of another Middle Eastern war, or maybe something else here, Craig? What are your thoughts there?

Craig Hemke: Well, I think that's always the fear, right? Any time U.S. troops and Russian troops are in close proximity, that should make everybody nervous, and I think that's something we all going to keep an eye on. But I think, more specific to the metals, and to the bigger picture, and kind of tie this back to the U.S. dollar, as you mentioned, we have stated since late last year that there would be 3 main themes that would dominate that dollar trade here in 2018, and that people need to watch. One of them is geopolitical risk because maybe the North Korea thing is starting to settle down, but the new Cold War between U.S., NATO, Russia, whether it's in Ukraine, whether it's in the Baltic states, whether it's now playing out in the Middle East, that's a risk that everybody needs to be mindful of as it pertains to Forex, and the dollar, and the other currencies, and then as that relates to gold and silver.

I think you've also got to be aware of political risk, especially here in the U.S. The opposition, if you will, to Donald Trump is coming after him it seems like every day. If we get into the late summer and into the early fall, ahead of the next U.S congressional elections and it appears that the Democrats could take control of the House and Senate, well, hells bells, your political risk is going to get shoved front and center as talks of impeachment and all kinds of other issues start to percolate and really grab the headlines.

And then lastly, and this gets back to the war issue, is de-dollarization risk. You mentioned yesterday, that Trump was withdrawing from the Iran deal. Anybody can go back and look, there was a speech that President Obama gave back in August of 2015 when this was all being negotiated, and maybe it was just scaremongering on his part, but he pointed out that if the U.S. continues down the road of just economic sanctions and laying them on heavier and heavier, that Iran is going to be forced, I mean, of course, why wouldn't they? Be forced to really help institute a system away from the U.S. dollar as the world's reserve currency, and that's what Obama said at the time. He said, "If we don't come up with a deal, we'd have to sanction international banks, we'd have to sanction Russia and China, as well, and that's just going to inspire this, I guess, a counter system to the dollar, to the Swift system, as well, which Iran was excluded from. And then that's just going to, eventually, be a threat to dollar hegemony and the debt-based system that the U.S. now runs."

And so, that now is potentially playing out. The Iranians already only accept Euro for their crude oil, but what's different now versus 2015 is we've got the yuan denominated crude oil contract in Shanghai, will make it very easy for the Iranians to go around any potential sanctions that the U.S. might put on and just simply sell their crude oil now in yuan, as well. And then that kind of builds up that infrastructure and that foundation, and the whole thing begins to really increase the rate of speed of the demise of this existing system. And that doesn't mean it's all going to fall apart by next week, but clearly, the foundation is being laid for at least an alternative to the dollar reserve system. And things like this, these extra sanctions, war, everything else, just simply drives, not only Iran, but their major trading partners into strengthening that system and offering the world an alternative. And in the end, again, that's very dollar bearish.

Mike Gleason: Getting back to metals here, Craig. We've seen gains in 2016 and 2017 in gold and silver prices and small gains, in gold at least, in 2018, which implies strong global demand. But the retail demand in the U.S. has been way down since Trump's election, if not before. What are your thoughts on this disconnect?

Craig Hemke: Yeah, there's all kinds of parallels you can draw, you know, it's about the weakest it's been since 2008, and people look at the stock market and that kind of thing and say, "See, there's another sign that the economy's about to roll over. There's very little demand for precious metals." There's no doubt about it. We've seen it across the board, whether it's at the mint. Internationally, though, there's no doubt that gold is valuable. Imports into places like India are soaring once again. We know about Russia, Kazakhstan, other sovereign wealth funds that are acquiring gold in significant amounts. At the end of the day it's kind of an indictment of the whole system, because in the West, nobody really cares about gold so much, and again, as evidenced in the sales, and they certainly don't care about owning physical gold. People in the West, they think they own gold if they own GLD, and we know how many flaws that thing has.

As you look at it from a retail investor, yeah, mint sales are down and maybe people aren't accessing the GLD, but gosh, in a truly physical sense, where the sovereign nations of the east, whether it's big investors, or jewelers, or jewelry demand, or whatever out of India, that demand for gold remains strong. And again, we get back to that supply demand picture because a lot of evidence out there that supply is really starting to get pinched. A lot of the major gold producers are showing tremendous drop offs in mine output. I saw something from Barrick a week or two ago that said their mine output is about half of what it was 5 or 6 years ago. And so, even though price is only set, at this point, in this trading in a paper derivatives, at some point we'd like to think that the physical fundamentals have an impact as well, and if supply continues to, at least not grow, if not contract a little bit, it won't take a whole lot of uptick in physical demand, whether it's from retail investors, but probably more importantly, global investors, to really start to skew the picture a little bit for price.

Mike Gleason: Well, as we begin to wrap up here, Craig, what are you going to be watching most closely in the days and months ahead, and then any other comments or stories that maybe we haven't touched on that you want to hit on before we close?

Craig Hemke: Well, let's just say there's 2 things. We've talked about the dollar, and obviously, that's very important because again, the price setting mechanism is in the futures market and these computers, I mean 90% of the volume, it's not just you and I, you know, buying 5 GCs (gold contacts) at the market. I mean, it's just computer programs that buy and sell based off of other input. Again, like the dollar, the dollar-yen, or the bond market. So, the most important thing for price at this point, is the overall trend of the dollar. If the dollar continues to spike, gold and silver are going to remain under pressure, no doubt about that, and probably even go lower.

So, we're going to watch that closely, but like I said, the dollar is, by any measure, at least in the short term, overbought. So, hopefully we can get a couple of point pullback and that will kind of ease the pressure that gold and silver have been under.

I think probably a more important, bigger picture item that people should watch is the bond market, because the Fed is just desperate to keep on this path of hiking the Fed funds rate. You know, if you go back to 2004 to 2008, they hiked it, the Fed funds, 25 basis points at 17 consecutive quarterly FOMC meetings. And it should be pointed out, gold went from $400 to $1,000 over that same time period, so that wasn't necessarily gold bearish. But the Fed is desperate to keep hiking rates.

The problem, where they've kind of painted themselves into a corner is, there's so many trillions and trillions of dollars, and euro, and yen floating around the world, that there's almost a constant bid for the longer end of the U.S. curve. And so, what they're doing is they're flattening it. The 2-year note is at two and a half and maybe the 10-year note's at three, that's only one half of one percent, or 50 basis point spread. If that were to invert, if the Fed keeps hiking, and they drive that 2-year note to three, and the 10-year stays at three or goes lower, then that's an inverted yield curve. And everybody that ever has taken economics know that an inverted yield curve, and the Fed data anybody can look up shows this too, inverted yield curve always leads to recession.

So, really they’re have painted themselves into a corner, like I said. If they keep raising short-term rates, and the long rates don't go anywhere, they're going to invert the yield curve, you're going to get a recession, and they're going to have to cut rates, and restart QE and all that kind of stuff. But if long rates do go up, if the bond market does burst, the debt service not only for all the public debt, but the private debt. The mortgage rates are going to skyrocket, the credit card rates are going to skyrocket, and the U.S. economy is going to go into a recession that way too! And so, either way, it certainly appears that within 6 to 12 months, the U.S. economy is going to begin to contract and head towards recession and all of this talk about normalization, and the Fed, and trimming their balance sheet, and all that stuff, is all going to turn out to be bunk. And the conversation's going to change to, oh boy, “We've got to start cutting rates. Oh, is there going to be more QE?” And then that's going to effect the dollar and that's going to have a rather dramatic impact on gold and silver.

So, I encourage everybody to watch the bond market, particularly long-term rates, because really, if the Fed keeps hiking, whether long rates go down or up, either way, it seems like a recession is imminent and that's going to change the whole ball game.

Mike Gleason: Yeah, it certainly seems like we're getting to that inflection point and there'll be some fireworks one way or the other. You talked about those different scenarios and that will be interesting to watch them play out here as we go on throughout the year.

Well, great comments as usual, Craig. It's always good to hear from you. Now before we sign off, though, please tell everyone about the TF Metals Report and what they'll find if they visit your site.

Craig Hemke: Well, like you said, we've been around, gosh, almost 8 years now. So, it's a wonderful site full of people that are all, I mean, we're all kind of realizing we're in the same boat of this debt-based Ponzi system that we're in, and that eventually it's going to implode. Gold and silver are a very important part of your personal financial protection. And so, it's a community of like-minded folks, and we're all supportive of each other, and frankly, that's the best part about this site. I also provide analysis, podcasts every single day, posts a couple of times a day, as well. For subscribers, it costs a whopping $12 a month to be a subscriber to get all of this outstanding analysis that I do, tongue in cheek I mention that. The 12 bucks gives you access to the site, $11 is for everybody else on the site, about a buck is what my stuff is worth, so that's how people should look at it. It's a wonderful community, unlike anyplace else on the internet, and I invite people to check it out, TFMetalsReport.com.

Mike Gleason: Well, it is outstanding stuff, tongue in cheek aside. We follow very closely here in our offices and it's always good to go through some of those stories with you and keep up the good work. Thanks very much for joining us, hope we can talk again soon, and take care, Craig.

Craig Hemke: Mike, it's always a pleasure. I think that by the next time we talk, it's going to be interesting to see how things look.

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 everyone to check that out and you'll want to check it out regularly for some of the best commentary on the metals markets that you will find anywhere.

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.