Ask The Expert - Jeff Nielson - May 2016

Transcript:

Man: You're listening to Ask the Expert on Sprott Money News.

Craig: Well, welcome back to Sprott Money News. This is the May edition of the Ask the Expert series. I'm your host, Craig Hemke, and joining us this month is author and analyst, Jeff Nielson. Jeff is a major contributor to the Sprott Money news blog. He also runs his own website, which is terrific, bullionbullscanada.com. And it's a pleasure to have Jeff back here on Ask the Expert. Jeff, thank you for joining us.

Jeff: Oh, well it's my pleasure as well.

Craig: Jeff, let's just dive right in. I've got a stack of questions that have been submitted by Sprott Money customers. And the first one deals with something that I know is on everyone's mind as we deal with the continuing financial crisis, and it has to do with bank bail-ins. Specifically, there's a lot of talk about bank bail-ins in Europe and in the U.S. but obviously Sprott's a Canadian company and you're based in Canada. And we have a lot of Canadian listeners. So do you think that this idea of bail-ins and the prospect of bank bail-ins applies to Canadian banks as well?

Jeff: Well, I don't even have to render an opinion here because it's all been put out in black and white. In fact, former Prime Minister, Stephen Harper, was one of the very first Western leaders to entrench the bail-in within our financial system. In fact, he did so in the most blatant manner of any Western government. He officially implanted it into the 2013 Canadian budget. So the bail-in has been the law of the land up in Canada now for more than three years, and so yes, it's not a matter of wondering whether this is a possibility in Canada, but rather knowing that it's a certainty if and when the big bank crime syndicate decides to perpetrate this act of naked theft.

Going right back to the first so-called bail-in that was staged in Cyprus, what we saw was nothing less than choreography. We had this naked active crime. There can be no possible rationale or justification for bail-ins, it's simply bankers pointing at assets they want to steal and having corrupt governments rubberstamp the request. And so we had the first bail-in staged in Cyprus, and then immediately we have this chorus of Western governments nodding their heads inanely and talking about how this is "a precedent." In other words, in our system of criminality, if you perpetrate a crime once and you're not prosecuted for it, it's no longer a crime, it's a "precedent."

Craig: Unfortunately you are spot on right there, Jeff. All right, let me move on to question number two. This one has to do with silver, and I guess specifically really silver-paper price manipulation. The independent analyst, Ted Butler, has written quite frequently about his idea that J.P. Morgan has used the five years since the silver price peak in the spring of 2011 to acquire vast amounts of physical silver. They've opened a silver vault on the COMEX, and they now, by Ted's estimation, have acquired as many as 400 million ounces of physical silver. At the end of the day, the question is what do you think of that theory?

Jeff: Well, first let me say that I have an enormous amount of respect for Mr. Butler. He is definitely one of the biggest influences on my own work and somebody whom I learned from in my own early days in writing on this sector. So I would never take anything he says lightly. But in this respect, I'm going to have to politely disagree with what he's written in this subject because I just simply look at the market and I say to myself, "How?" If we go back to the 1980s, beginning of 1980s when the Hunt brothers "cornered the silver market," at that time, they obtained a total of amount of silver that was roughly equivalent to I think it was 19% of total global inventories at that time.

And even with 19% of total inventories, that was considered to be "cornering the market." They were prosecuted for it. But beyond that, look what happened to the price of silver when the Hunt brothers were accumulating that small chunk of total inventory. It soared to fantastic multiples of where it started when the Hunt brothers began their play. So now we're talking about a silver horde that supposedly is even larger than what the Hunt brothers amassed 35 years ago. It comes at a time when global inventories are only a tiny fraction of what they were back in 1980. And yet, while J.P. Morgan was supposedly amassing this fantastic horde of silver, the price of silver was actually declining.

And I look at those fundamentals and I simply say, "How?" There's no way that you can have somebody supposedly cornering the market to a more extreme degree than what the Hunt brothers did 35 years ago with literally no price response in the market. It just looks to me as a totally impossible set of parameters.

Craig: Fair enough. All right, the next question has to do with what appears to be a resumption of the bull market in paper gold and silver here in 2016. You've been on the record though saying that you think this initial move perhaps is just a fake out one last attempt to suck in as many longs on the paper side as possible. The question ultimately is what would change your mind and convince you that there is not another test that the bottom's coming and that this really is the real thing?

Jeff: Well, I guess the blip answer to that would be to see metals prices hit new highs. And of course we're light years away from that at this point. But beyond that, I really don't see anything that could cause me to change my opinion. And I look around at somebody who's perhaps a contrary and even among contrarians, and for instance, I see J.P. Morgan trumpeting that there's now a new and long term bull market for gold for which their clients should be positioning themselves. And of course we have a sophisticated audience here, so I mean the people listening to this understand that higher [bland] and higher gold prices are a total anathema for these big banks.

And so I ask myself, "Even if there was really a new long-term bull market that had just started for gold, would J.P. Morgan come out and broadcast that fact to the world?" I strongly doubt it. It is much more probable that's a fake out to, as you say, lure people in for one head fake before crashing the markets again. The next thing I look at is, going back five years to when we still had something that resembled markets for precious metals, the precious metal sector was an extremely seasonal trade. And specifically, we would always see the market weaken for the end of April, beginning of May, go dormant over most of the summer, and then pick up again in September.

So here we have all of these mainstream born-again gold bulls jumping on the bandwagon and talking about, "Gold rally, gold rally, gold rally," and I'm not hearing the, "Sell in May and go away." And of course, that is more than suspicious because it's been a regular refrain of the bankers, and their sycophants, and the media for decades. And then lastly, I'm also on the record as saying that the next crash for our bubble economy is just scheduled for this year. And of course if you look back to the crash of '08, we saw markets taken down. And even though gold and silver are supposed to be safe havens, they were crashed right along with those other markets, because of course the banks would never gold and silver to stand out as safe havens in a time of crisis.

So as we teeter on the verge of another crash, I ask myself once again, "Would the big banks ever allow gold and silver to rally while all of their paper assets were plunging?" And my answer to that is of course that could never happen.

Craig: To that end, Jeff, what do you make of the historical levels that we've seen in the gold/silver ratio? A lot of folks think that an appropriate ratio between the price of the two is somewhere near 10 to 1, or 16 to 1, or 20 to 1, but yet, we saw 80 to 1 recently. And I think we're currently around 72 or 73 to 1. What do you make of that ratio, and is it telling you anything significant?

Jeff: Well, of course, it's another factor that leads me to believe that this is not a real rally, because the fact that the gold/silver ratio got such extreme proportions, what that means is if a genuine rally had commenced again in this sector, we would've expected silver to be first out of the starting gate and leaps and bounds ahead of gold in terms of the price gains. And what we saw was the exact opposite. We saw gold leap out of the starting block, and silver basically just stand still for a couple of months. Once again, this is something that makes no sense at all this was a legitimate rally because with silver being so much more ridiculously underpriced and so much more upward pressure on this market as a result, it should have literally exploded higher in any legitimate rally.

Craig: Interesting point. All right, couple questions left, Jeff. The first one has to deal with the paper markets themselves, specifically the COMEX in New York. Most everyone recognizes that they are heavily leveraged, that there's not nearly the physical gold and silver behind the amount of paper contracts that are there. When this I guess game of musical chairs ends, do you expect a COMEX or some other type of delivery default? And if that were to happen, what do you think would be the ramifications?

Jeff: Well, to answer that question, I would look back close to a decade to the silver market, and of course in the middle of last decade, what we saw officially was silver inventories plummeting to all-time lows. Over the course of the previous 15 years, official inventories have plummeted by 90%, and the rate of that inventory decline suggested that we were clearly headed for a silver default some time in 2007. Now at the time, with the banksters did was they faked a gain in silver inventories. They simply engaged in the most ludicrous inventory fraud to manufacture a supposed turnaround in silver inventories and began to put out propaganda that silver inventories were starting to build again.

Of course more recently, they finally acknowledged that the silver market has been in supply deficit during all those years, and in fact, I put out a commentary myself a few months ago putting all the pieces together and suggesting that what we see quite clearly is a silver market that's been in constant deficit for at least 30 years. So back in 2005, silver inventories were almost completely exhausted. They were being depleted at a rate of abruptly 150 million ounces a year. That projected to a default in 2007. We've continued to have a supply deficit every year since then, but there's been no official default. So my suggestion is that we'd already had unofficial default in the COMEX, and the big banks simply go on their merry way and pretend like nothing's happened.

They simply scrounge up a little bit of metal here and there to satisfy the contracts that have to be satisfied immediately. And of course, the big game in this paper shuffle is to try to get as many traders as possible to engage in "cash settlement," where we have people supposedly trading silver and supposedly trading gold, but all of it ever...it gets swapped back and forth as paper.

Craig: Exactly. All right, Jeff, one last question for you. And I guess this kind of gets back to one of the earlier questions we were talking about this nascent rally, semi bull market in gold and silver. We've seen a tremendous rally in the mining shares so far in 2016 with a lot of the indices having more than doubled, some of the individual shares triple and quadruple just in the last 100 days. Basically what do you expect going forward? Is this a rally that will hold, or would you expect the mining shares to give back these gains as well?

Jeff: Well, of course, if I'm correct and precious metals themselves are going to be taken down along with all of the other markets, then the mining sector rally can't hold either, because as many of our listeners and readers know, the miners leverage metals prices. So they rise faster on the way up, they fall faster on the way down, so if in fact we're going to see this pseudo-rally reversed, which is what I strongly believe, then unfortunately we're going to see the same thing with the miners. But I should add here that I've continued to hold my own mining shares. I have no intention of doing any selling now despite what I think, because of course for one thing, I can always be wrong in my own prognostication.

But the other factor, which we can never fail to consider, is that while this bank and crime syndicate is nearly omnipotent in terms of its ability to play the markets, it makes mistakes. And they try to execute plans and they fail sometimes. So they could have a script already planned in terms of crashing markets and crashing precious metals prices along with it and simply fail to execute. So I would never consider selling my bullion and look to buy it back cheaper. I would never consider selling my miners and look to buy it back cheaper because despite what I suspect or strongly believe is going to occur, nothing here is carved in stone.

So I'm calling for precious metals to be taken down again with the rest of the markets. I would expect the miners to follow that. I certainly hope I'm wrong.

Craig: Well, your site is called "Bullion Bulls Canada," not "Bullion Bears Canada," after all. So, Jeff, thank you. This is been very insightful. Please take a second though and tell everybody about your work and where they can find your work and your site.

Jeff: Well, I started Bullion Bulls Canada back in the beginning of 2009, just at the start of the last big rally in this sector, and I've put out more than 1,000 commentaries since that time. And of course, a lot of my work is more broadly based in general economics because we can't really understand precious metals without a much more general understanding of our economies and even geopolitics in the world. So I try to delve quite broadly into the topics I write about to try to give people a really comprehensive understanding of this sector, and hopefully I've been somewhat successful in doing that.

Craig: Certainly does help us all in our understanding of the markets, Jeff, and we at Sprott Money and Sprott Money News certainly appreciate all your assistance in sharing your insights with us at the Sprott Money site as well. Thanks for your time today. This has been very insightful.

Jeff: Well, like I say, it's my pleasure to be here, and I'd be happy to come back anytime.

Craig: And from all of us at Sprott Money News, thanks for listening, and we look forward to visiting with you again next month.