Ed Steer: Gold/Silver Price Management Scheme Will End "Spectacularly and Suddenly"
Welcome to this week's Market Wrap Podcast, I'm Mike Gleason.
Coming up, we'll hear a fantastic interview with first time guest Ed Steer of Ed Steer's Gold and Silver Digest and also board member at GATA. Ed talks about a strategy that many mining companies are employing today that will have a long-term and detrimental impact on the future supply of gold and silver. He also reveals how manipulation in the precious metals markets is poised to backfire. Don't miss a wonderful interview with Ed Steer, coming up after this week's market update.
Despite a big decline in crude oil prices and a slightly stronger dollar this week, precious metals markets are holding their own. Gold prices currently check in at $1,286 an ounce, up 0.8% since last Friday's close. Silver is up 1.0% this week to trade at $17.11. Platinum prices come in at $944 per ounce, while palladium is trading at $993 as of this Friday's recording.
On Thursday, President Donald Trump went to Capitol Hill to try to rally Senate Republicans behind tax reform legislation. The House passed its version of the bill yesterday. But many promising reforms have now been watered down or walked back completely in order to appease special interests and Big Government Republicans.
The Washington establishment has dashed the great hope of being able to cut out all the loopholes and needless complexity from the tax code, to lower rates dramatically across the board, and to allow Americans to file their returns on a postcard.
The multi-billion dollar tax compliance industry will continue to thrive, as will promoters of tax avoidance schemes such as offshore trusts. The line between legal tax avoidance and illegal tax evasion isn't always clear, especially when it comes to complex financial structures and offshore arrangements.
There is rarely any legitimate tax benefit to be gained from owning assets overseas. And there are additional tax burdens, such as so-called "FATCA" foreign account reporting requirements. The FATCA rules make it difficult for U.S. customers to even open foreign bank accounts these days. In fact, many banks outside the U.S. don't want anything to do with Americans because of all of the regulatory hassles.
It's still possible to own and store gold coins in a safe located in a foreign country without triggering foreign account reporting requirements. But some offshore gold programs, including some digital gold accounts, are subject to FATCA rules. Others are in a gray area where not reporting the foreign gold holdings could be considered illegal depending on how IRS bureaucrats decide to interpret the law.
Some offshore promoters claim that holding precious metals outside of the country will protect them from the threat of confiscation in the United States. Much like promoters of specialty "rare" coins, offshore promoters tend to exaggerate the confiscation threat, while failing to mention solutions that might be less expensive and less risky.
There's no reason to believe other governments are inherently less prone to seize assets. Even Switzerland's once-sterling reputation for financial privacy and asset protection has been tarnished in recent years.
The super-rich and people who travel abroad regularly may find it useful to store some gold in a vault in another country. But most people should keep their gold closer to home, where they can access it whenever the need arises.
In the case of high-premium numismatic coins that are touted as "confiscation proof," the same supposed legal protection can be gained from American Eagles. Popular gold and silver Eagles are considered by law to be numismatic... Other coins that are just as historic as their "rare" counterparts can be had for bullion-like prices because they aren't slabbed and graded.
At the end of the day, getting more metal for your dollars is a better hedge against economic and political risk. During a crisis, you may need to sell or barter with portions of your precious metals stash. Graded coins and proof finishes may not command any premium, as is the case now with a lot of these coins being sold into a relatively soft retail market. Keep in mind that the most widely recognized bullion products in the most common sizes will always be the most liquid and useful.
Well now, without further delay, let's get right to this week's exclusive interview.
Mike Gleason: It is my privilege now to welcome in Ed Steer of Ed Steer's Gold and Silver Digest. Ed has covered the precious metals markets for going on two decades now, having written for Casey Research prior to his latest project, and is also the director at GATA, the Gold Anti-Trust Action Committee, where he and his colleagues work to expose the manipulation in the gold and silver markets.
It's a real pleasure to have him on with us today. Ed, welcome, and it's great to finally have a chance to talk to you. Thanks for coming on.
Ed Steer: Well, thanks for having me, Mike.
Mike Gleason: First off here, Ed, I wanted to have you set the stage for a lot of what we're going to talk about today - that being this big disconnect between the demand in the physical market and the futures market price. Explain how that all works for our listeners who might not understand how there can be so much physical demand for metals throughout the world without prices moving higher. If you would, walk us through how the futures markets have allowed bankers to control prices by using paper silver and paper gold, which has an unlimited supply to meet demand.
Ed Steer: It's actually very simple, really. Supply and demand really don't enter into the picture as far as precious metal prices go. And that's for the very simple reason that the price of the product, gold, silver, platinum, or palladium is set in the COMEX futures market in New York. It's not set in London, it's not set in Shanghai, it's not set anywhere else in the world. It's set in the COMEX futures market in New York. I want to put that to bed right away.
And the fact of the matter is that eight traders - Ted Butler, silver analyst Ted Butler's been working on this for decades now; three decades, as a matter of fact - eight traders, all of them US banks or investment houses, are short more than 50% of the entire COMEX futures market, open interest in gold and silver, platinum and palladium. They all work in collusion and they all buy at the same time, they all sell at the same time. When you control more than 50% of the market, you control the price. It's as simple as that, and that's the reason why prices are where they are today, regardless of what supply and demand is.
Mike Gleason: You wrote an article just yesterday about bullion banks once again increasing their already massive short position in the futures markets. They're busy selling paper to any and all comers. It looks like, despite all the evidence of cheating and price rigging, very little has changed. But what is your sense? Are the bullion banks showing any concern about the lawsuits being brought by clients they have cheated, or is it business as usual?
Ed Steer: I'll tell you what. I really don't know what's going on under the surface, but on the surface when you look at the face of it and the daily price activity, it certainly looks like business as usual to me. As a matter of fact, the price management scheme in the last year or so has become even more intense as these eight traders, especially the big four, J.P. Morgan, HSBC USA, Scotiabank, and probably Citigroup, have become more and more... The short position has become more and more concentrated with them. Nothing has really changed that we can see. There are signs under the surface, which if you want me to go into, I certainly can, that things are changing. But regardless of the fact of what's going on under the surface, this can't and won't last forever.
Mike Gleason: Why hasn't the mining industry been more vocal about the manipulative schemes by these bullion banks and central planners? This is something I've talked to First Majestic's (NYSE:AG) Keith Neumeyer about. He is very outspoken on the subject, and has actively recruited fellow mining execs to join him in speaking out about this. But so far at least, he has gotten zero support. This is just mind-boggling to me. Why are they silent, and why is Keith Neumeyer a lone voice here when it comes to speaking out against this practice in the futures markets that is suppressing the price of the product these mining companies sell? Any thoughts as to why more aren't crying foul?
Ed Steer: Well, thank you for answering half of the question for me, because I was going to mention that Keith Neumeyer has been the only voice in the wilderness over the last several years. I've talked to Keith. I know Keith well, and he's brought this up with his colleagues at the big mining companies in the U.S. Why he can't get any traction with these guys, I just don't know.
The mining executives and the big CEOs of these mining companies are paid well, they get good compensation, they have stock options up the wazoo, they're sitting pretty. I don't think they really care about what the average shareholder suffers in this thing. Why they don't want to go after higher silver prices... I would suggest that they've been basically told that this would not be a very good idea. So I just do not understand for the life of me why they aren't up in arms about this, because if I was in the silver mining industry, I certainly would be. And my congratulations to Keith for all his efforts.
Mike Gleason: Speaking of miners, I've heard you talk about how these mining companies are changing their mining plans to high grade, which is going to hurt the shelf life of these mines. Now, we know how difficult it can be to get a new mine up and running and how long the exploration and permitting process can be. Talk about how damaging it is to the future supply of gold and silver for all these mines to change course and high-grade. What is high-grading, and what are the long-term effects for future supply as a result of that, Ed?
Ed Steer: Well, the problem with mining is it's a low-margin business. And in order for most mining companies to stay profitable, they have to go after the highest-grade ore in their mines. This is not all mines, but certainly some mines. They go after the highest grade because they need the maximum amount of gold production just to make ends meet and to keep the company solvent.
The problem with that process, of course, is the fact that when you change your mine plan to mine this ore, you have to leave a lot of stuff in the ground that you're never going to be able to recover because your drifts go this way and then your tunneling goes that way. When you do that to high-grade whatever section, then there's a whole section of lower grade ore that, because of what they've done in high-grading, they just can never recover.
So it is hugely detrimental to the mining industry, but some of the mining companies have no choice. And that's certainly going to show up as a supply factor down the road, and it's coming up hard in some cases. Certainly, within the next two or three years, we're going to see mining in gold and silver - the production - drop off precipitously.
Mike Gleason: You talked earlier about how the markets are not truly driven by fundamental supply and demand, so to speak. Eventually, will that become the determining factor in determining the price of gold and silver if we truly don't have enough supply to meet the demand? Does it matter if they can continue to sell all these paper ounces, or will the fact that there's just not the physical metal out there because of the things that you just talked about, will that actually factor in?
Ed Steer: Well, certainly the supply issue is critical. There's a point where I don't care how much paper you write, if the physical supply isn't there when it's demanded by the consumer, especially industrial consumer in the case of silver, then all the paper in the world isn't going to help and they're going to go after whatever silver they can get - whether it be on the COMEX or from whoever. At that point, the price management scheme will certainly fail spectacularly. But until the boys, the central banks and the bullion banks have reached that point, I don't think they're going to give up this fight. But they certainly are aware of the fact that their best use or use before date is coming up on them pretty hard. At some point it will matter, but right now it doesn't.
Mike Gleason: What will the tipping point be? When does the system break? How will it break? Do you have any thoughts on how that might play out when the whole jig is up, as they say, in the gold and silver markets?
Ed Steer: Everybody wants to know when. They've been asking that question for, what, 10 years now at least? Nobody has the answer to that. As far as how it's going to end, I would think that there's only one way for this thing to end, and that's spectacularly and suddenly. I can hardly wait for that day, as far as I'm concerned, but as I said, until that day arrives, it appears, at least on the surface of everything, to be business as usual.
Mike Gleason: A lot of people are just waiting for the incredibly overvalued stock market to finally undergo a correction, perhaps a very big one. Talk about what you think will happen to the metals in that situation. Could it look like the 2008 financial crisis, or how might it look different this time around? In that scenario, would we see a flight to save havens that will drive the price up massively, or will we see a similar situation where the metals get taken down along with equities, at least initially? Where do you put the odds of a major stock market collapse, and if that happens, how do you expect the metals will respond, Ed?
Ed Steer: Well, all the markets out there, whether it be the financial markets or the stock markets or the bond markets or the currency markets, everything is managed. As Chris Powell of GATA said back in 2008, there are no markets anymore, only interventions. And if we see a big stock market correction, I would suspect that we'll see gold and silver and the shares get hit equally as hard - but that won't be because of supply and demand factors or because people aren't buying. It's because the boys just want to prevent people from having any safe haven out there. But at some point, they are going to get overwhelmed, but they're going to do everything they can to prevent people from running to the precious metals.
If you look at the gold and silver charts this morning, the dollar index was heading lower and the gold and silver prices were heading higher. Then, as soon as the COMEX opened, they turned the dollar index and gold and silver got hit and they were both down on the day. It's just kind of micro price managements going on hour by hour, day by day.
I would think that if we do see a major stock market correction, the boys will be standing by to make sure that none of that money runs into gold and silver. They'll hit the price. But I would expect that sometime, like in 2007, 2008, regardless of that fact, there will be some sort of tipping point where enough people go into the market so it'll drive the price higher. And I would expect that J.P. Morgan and the rest of the bullion banks will fight a hammer and tong until they're down to their last COMEX contract.
Mike Gleason: Obviously, there's a very strong inverse correlation between equities and the metals, but also there is between the dollar and gold and silver. What do you see for the dollar coming up here? We've got a new Fed share coming up here at the beginning of next year. We've got another Fed meeting next month, where it's expected that they'll raise interest rates. Any thoughts on the dollar and how that might impact gold and silver here in the short to intermediate run?
Ed Steer: Well, I can tell you right now that, despite the fact that the dollar index is down almost 1,000 basis points this year, it certainly hasn't been reflected in precious metal prices. Like I said in the last question you just asked me, Mike, was the fact that if the dollar index goes down, they don't allow precious metal prices to rally that much. They were certainly in the market this morning when London opened, keeping the price under control, because it certainly wanted to blast higher.
The dollar index, like I said, has been down so much this year that that isn't reflected in the prices either. They're going to be fighting this thing all the way down, regardless of whether the dollar's falling or the stock market is falling. They just do not want people to run from the paper markets into anything that's solid. That includes the precious metals and any other physically traded commodity.
Mike Gleason: Any advice for the beleaguered and perhaps worn out metals investor who is processing all of this information about manipulation and feeling frustrated because metals continue to underperform other assets? What do you have to say to those folks as we begin to close here?
Ed Steer: Well, I can tell you this right now, this is not going to last forever. At some point, they're going to have to give all this whole thing up and let the market find its true value. That's just not in precious metals. I'm talking about the stock market, the bond market, the dollar index, because since the crash of '87, the bullion banks and central banks of the world have been actively involved in keeping the markets up and going around the track.
As I said in my column this morning, I'll just quote this for you, Mike, if you don't mind. British economist Peter Warburton had this to say back in 2001. That was what, 16 years ago? Regarding the central banks and bullion banks, he says, "They incite investment banks and other willing parties to bet against the rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the U.S. dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity they had against the fragility of the financial system by switching into a freely traded market for non-financial assets."
Of course, that is the commodities market complex, with the precious metals market being the big case in point. The thing is that this has been going on now for almost a generation. And at some point, it's definitely going to give way and we're going to see brand new prices for everything, and we're going to see runaway inflation, and we're going to see gold and silver at prices that, quite frankly, we couldn't possibly imagine today. At that point in time, we'll all be vindicated. The only thing we don't know for sure, Mike, is when that day is coming. But it is coming.
Mike Gleason: It will be fantastic to truly finally have real price transparency, price discovery in these markets. It's a long time coming. We'll have to continue to wait, and hopefully, that day will come relatively soon.
Well, thanks very much, Ed, for coming on and sharing your thoughts on these important matters. I really enjoyed having you on today...
Well, that will do it for this week's Market Wrap Podcast. Be sure to check back throughout the year as we look to bring you more great content and exclusive interviews. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend, everybody.