Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up, David Jensen of Jensen Strategic joins me for a revealing conversation on why he believes we’ve passed the point of no return when it comes to monetary policy, how the recent injection of liquidity by the Fed will NOT be able to reverse the problems it’s been creating, and why the explosion in palladium prices is a foreshadowing some BIG developments in the gold and silver markets. So stick around for a must-hear interview with David Jensen, coming up after this week’s market update.

A rising U.S. dollar is putting downward pressure on precious metals prices this week.

On Thursday, gold and silver markets took a beating under a confluence of adverse forces. In addition to dollar strength versus foreign currencies, trade optimism and rising bond yields drew investors out of precious metals.

As of this Friday recording, gold is settling lower by $46 or 3.2% for the week to come in at $1,468 per ounce. Silver, meanwhile, re-tested the $17.00 level during Thursday’s selling. The white metal now at $17.02 an ounce and is registering a whopping weekly decline of $1.18 or 6.5%.

Turning to the PGMs, platinum is down similarly to silver, off $60 or 6.3% this week to trade at $894. And palladium is off 3.3% to come in at $1,756 per ounce.

Metals lost some of their safe-haven appeal after China and the United States reportedly reached an agreement to cancel some of the tariffs imposed by both sides in recent months. A ramping down of the trade war was deemed by investors to be good news for the U.S. economy, which has experienced a slowdown in the manufacturing sector.

Investors apparently perceive the risk of a recession to be waning, at least for now. That is being reflected in a steepening yield curve.

Back in August, the yield curve had inverted, meaning some longer-term Treasuries yielded less than shorter-term paper. Much talk about a looming recession followed in the media. One still may be coming. In the past, recessions have occurred several months to a year after an inversion.

Meanwhile, the Federal Reserve has cut short-term rates to try to stave off a recession. It has also committed hundreds of billions of dollars to repo and Treasury bill markets to keep overnight rates from rising above target.

This week, long-term bond yields spiked. The 30-year Treasury saw a yield above 2.4% for the first time since July. The 10-year yield jumped past 1.9% on Thursday in its biggest move since the day after Donald Trump was elected in November 2016.

Interest rate sensitive sectors of the stock market, including real estate and utilities, got clobbered as sector rotation took place. In favor were sectors included energy, technology, and cyclicals.

On the plus side for hard asset investors, industrial commodities including copper benefited from the “risk on” trade. Copper prices rose Thursday to a three and half month high.

If you’re bullish on the global economy in general – and perhaps the prospects for Trump’s trade policies boosting U.S. industries in particular – then copper may be a good play.

Rising demand for copper threatens to outweigh its supply. Miners are finding less copper on digs, and low spot prices have deterred development of new copper sources.

This year has seen copper prices make little progress. They have dipped into a trading range, but that trading range is now showing signs of resolving to the upside.

Physical copper can play a relatively small but vital role within a diversified investment portfolio. Like gold and silver, copper has been used in coinage and serves as a store of value over time.

In fact, U.S. pennies minted prior to 1982 are one of the handiest and most straightforward ways to own physical copper, including the lowest cost way to purchase the metal.

Money Metals Exchange also offers pure copper rounds, including our new copper President Trump round. They are .999 pure copper bullion and commemorate the 45th President of the United States, Donald J. Trump.

Money Metals sells these Trump Copper Rounds in full tubes of 20. They will serve as the perfect gift for anyone who loves our 45th president.

There’s no denying President Trump is one of the more controversial political figures in American history, so this type of commemorative item just may well be in high demand for a long time to come.

We also offer gold and silver Trump rounds in multiple sizes. The 2 Oz Ultra High Relief Pure Silver Round may make the biggest impression.

Of course, if you’re just looking to accumulate bullion while keeping a low profile and not drawing any unwanted negative attention to yourself, you might prefer to opt for a more politically neutral product.

Bullion bars are a plain but efficient way to accumulate any of the metals we offer – from copper to gold, silver, platinum, palladium, and even rhodium. Check out our complete product lineup and take advantage of the recent price dip by going to MoneyMetals.com.

Well now, without further delay, let’s get right to this week’s exclusive interview.

David Jensen

Mike Gleason: It is my privilege now to welcome in David Jensen of Jensen Strategic and a highly studied mining analyst and precious metals expert with close to two decades of experience in the mining industry. And it's great to have him back on with us.

David, thanks so much for the time again today, and it's nice to talk to you again. Welcome.

David Jensen: Thank you, Mike. It's good to be back with you again.

Mike Gleason: Well, David, we had you back on at the beginning of the year and you shared some amazing insights on palladium, and we'll get to that in a bit because that market is still very interesting. But first off, you've been watching the Fed balance sheet closely here and I wanted to get your comments about that to begin with. Now, after the extraordinary expansion, which followed the 2008 financial crisis and a few rounds of QE, the Fed began contracting the money supply in 2017. You've been making the case that the withdrawal of liquidity could trigger another catastrophe.

So, let's start with the basics here. If you would, please explain the history of the Fed's balance sheet, and why it is something investors should be carefully watching.

David Jensen: Yeah, I think that the root of it all, the reason we're watching so closely is the tremendous imbalance between the amount of cash, liquid cash that's in the system versus the amount of debt. And the Fed has run interest rates from around 20% in 1980 down to 0% or 0.25% here a couple of years ago. And what they've done is expanded the greatest debt bubble in history. The total debt in the U.S., now on all levels according to the Fed's flow of funds report is about $72 trillion. And to serve as that $72 trillion of debt that's in extent, there's only $14 trillion of liquid currency in deposits and in physical cash. So, what we're seeing now is that the Fed needs to continually to expand the money stock with the money supply. The money supply is the annual change or the addition to the outstanding money stocked addition to the $14 trillion that's out every year. And they need to add a substantial amount so that the debt can be serviced and so that the economy can continue to move forward.

And what they've done in the last three years, since Q1 2017, they've contracted the money supply, which is, again, the year over year change, they've decreased that increase down to about 3% from roughly about 11% in Q4 2016. So really a precipitous drop.

And so what we're seeing now is that the rise of the interest rates and the, and the cutoff of the money supply, they've basically withdrawn about a one and a half trillion dollars of additional liquidity, which would be here if it continued to run it at the same run rate as in Q4 2016. So, they've withdrawn or tightened a substantial amount. And as interest rates go up, it also, over time, generates a need for about another $2 trillion per annum in interest payments. So what they've done is they've really created a liquidity crisis here in the market. There's not enough money to pay the debt that's outstanding. And, of course, the most levered or the most unstable borrowers show the distress first when these things happen. And that's what we saw in the repo market here in September, was that that market started to seize up because the capital wasn't there to meet the needs.

Mike Gleason: Kind of leads me right into my next question. The Fed has really been pumping lots and lots of money into that repo market and they've extended it multiple times. You see this intervention in the repo markets as the “first domino to fall," and what might be the next financial crisis. The Fed, is as usual, not bothering to explain itself, but we know that, we're pretty sure, that it isn't good. Give us some more of your insights on that repo market intervention and why it could be the signal of larger troubles ahead.

David Jensen: Yeah, it's a signal of illiquidity in the financial market. So any borrower of size, a hedge fund or a money manager, a bank can step into that market and borrow in that market in return for providing collateral, whether it's a treasury or some other type of security. And that market basically dried up because the liquidity was not there, it wasn't available. But the issue that I really see is at the core of this, is that leverage loan market, which is the most highly indebted borrowers. And that market collapsed in Q1 2008 and kicked off the great financial crisis. And that market, now, there's a tremendous decay in the credit worthiness of the borrowers in that market. So we're seeing the signs here that there's a collapse in the credit worthiness of the most highly leveraged in society.

And just to give you a sense of the repo market, Mike, it's about a $5 trillion market and about three and a half to $4 trillion of that rolls on a nightly basis. So they're just 24 hour loans. So any kind of a seizure in that market can cause great problems in the financial markets as a whole. But the greater question is, is why is this market seizing up to begin with? What is the problem here? And the problem that I maintain is this continual drying out of the economy and taking away liquidity from the economy that's gone on ever since the beginning of 2017.

Mike Gleason: So, the Fed's created a problem by contracting the money supply. Is there any chance that this sudden about-face, the repo market interventions and the new bond purchase program, that we're not supposed to call Kiwi four, by the way, will that be enough to prevent disaster, David?

David Jensen: Well, you're talking about a net shortfall that's occurred now in the order of trillions of dollars. And it takes years for monetary policy changes to impact the economy as a whole. So, you've got many trillions and it has to basically infiltrate the economy, the money expansion as it occurs has to disperse throughout the economy and be utilized. And we're at the point now where so many of the unstable bubble activities have been tripped out. I believe that they're not going to be able to address this with monetary policy, it just takes too long and the drying out of the economy of monetary liquidity has gone on for too long to date. The damage is already done.

Mike Gleason: Yeah, we would agree. It's going to be interesting to watch things continue to unfold there, but we know that we don't know the full story, I think, when it comes to all this repo market stuff.

Well, turning to palladium now, we had you on back in January of this year. And we spoke quite a bit about the palladium situation. At the time, there was a major supply shortage in that market and since then, things haven't changed too much and we've seen the price of palladium go from a little over $1,300 back in January to nearly $1,800 here today. So what's the latest on palladium and why have we seen this amazing resilience? Because not many in the metals community would have expected the meteoric rise to continue and then see it remain so firm and never really show signs of cracking or experiencing any real pullback, to speak of. So what's going on with palladium now, David?

David Jensen: Well, it's a good old fashioned shortage. The conundrum or the question is, why is there a metal shortage when the auto industry is in free fall? About 80% of palladium is used in catalytic converters in automobiles. And you would think that the demand would decline along with the production of autos. But I think there's another dynamic at play here, is that the Eurozone have been practicing very loose monetary policies, as many of the banks around the world. And I think that at the margins, these are very small markets compared to the amount of capital out there. All the gold in the world is worth just one or 2% of the total capital markets out there. So, what we're seeing now with palladium, which is a fraction of the size of the gold market, I mean, the above ground stocks are nothing and annual production is in the order of about a 10th of the amount of gold.

But I think what's happening here that's driving the shortage, and since we talked in January, the lease rates have started to spike up again. We're now seeing the lease rates, on average, in and around the 8% level. So in London where this metal is traded and where there's actual delivery of metal, is insufficient metal there to meet the market demand. But I think that there's demand, it's not just auto demand that's out there. I think that if you look back in 2016, the German government went negative with the bunds there for the first time, the market did. And I think what you have is just that at the margins, enough investors start to buy real assets, including these intrinsically valuable assets like palladium and platinum, gold and silver.

But that the palladium market was already tight to begin with. We’d run over two years there where there was visible shortage and lease rate spikes in the market. The gold, silver, platinum, palladium market, they all trade promissory notes, not the metal. So, the pricing can be anywhere. But when you have metal shortages, with palladium, you can't manipulate the market with paper anymore. You try to sell a load of paper, a promissory note as these spot contracts are these unallocated spot contracts. When you have physical metal shortage, those that you've sold the contracts to say, "Okay, we'd like to take delivery of the bars now." And you have a default situation arising.

So the games can't be played in the market when you have shortage as you do with rhodium, which is a sister metal. It's not traded on exchanges, same applications as a palladium. It's gone up nine times now in the last three years and palladium has roughly tripled in price. So, there's been really tremendous price moves here, driven by good old-fashioned supply and demand dynamics. Pushing aside paper pricing, using these unallocated promissory notes in the COMEX and especially in London, which is the primary physical exchange.

Mike Gleason: So, how might all this affect gold and silver, which are obviously the much bigger markets and the precious metals that most of us pay more attention to. What kind of spillover effect might the situation in palladium have on the money metals? And what can we portend, potentially, as this relates to gold and silver?

David Jensen: Well, the, the spillover effect, I think, really comes from the central banks. They've run monetary policy now that has been, I think, wild is the kindest way to describe it, over the last 50 years especially. But they've run the debt market up so high and the bond market up so high. And this monetary inflation has been parked in these financial markets, especially in the bond markets. Now, what the Fed has done by choking off the money supply, they've, in essence, lit a fire in the bond market. Because when you trip the economy into a gross contraction, what happens is that you run enormous deficits. And in the end, you will not be able to have the demand in the market for the treasuries or whatever government security that you're selling, and it leads to financing just by monetizing the debt.

So in essence, Mike, the demand comes from the central bank money supply or looseness of their monetary policy. It's hidden for a very long time because the financial markets climb. They get their rulers out and they project for decades how high they’ll go. But eventually, you get to the point where you can't stimulate the markets higher anymore because of the tremendous distortion built into the economy.

And as I maintain, really the crisis that we're going to have now from the credit limitation that's gone on for the last three years here. So, those holding the paper assets like bonds and other securities see that we're in for a growth slowdown with even more gross money printing by the central banks. And that's when you start seeing the movement from the paper holders into real assets of intrinsic value. And I think, then, what you have is just a tremendous vault in the price of these metals. But I think it will probably lead to some sort of a of a dislocation at these exchanges, which are so heavily papered and have only a tiny fraction of the amount of metal there for the number of contracts which are held in the spot markets there.

Mike Gleason: Yeah. Obviously the palladium market seems to be a market right now where supply and demand fundamentals do exist and it's driving the price. And wouldn't it be something if maybe that finally happened with silver, which unfortunately can be pushed around with all the paper that they seem to create there.

David Jensen: It will come. It will come to the silver market. It'll come to the platinum and gold market. It just takes a little bit longer because they're not quite as tight as the palladium market.

Mike Gleason: Well finally, David, as we begin to wrap up, give us an early 2020 outlook, if you would, what kind of a year do you expect it to be in the markets and the metals, specifically? And then also comment on anything else that you’re going to be watching most closely as you continue to analyze the state of the financial world.

David Jensen: Yeah. Well, I mean anything can happen in the metals market in terms of price wise. But at some point, the basic papering of the market is going to fail. Now people have been calling for that for decades. But I do think, Mike, what's very different here is the fact that the Fed has acted as radically as it has over the last three years in contracting the money supply to the level that is well known to have caused the prior three crises. And if your listeners go to @RealDavidJensen on Twitter, the first thing that's posted in there as a chart of the money supply, how that's contracted and how that led to crises the last three times. So my sense is that we're going to have a breakage at some point in these markets and the printing is going to be enormous. But also that there'll be a sizeable amount of chaos and carnage.

So not good news. The last thing you want is metals to go up because you have a tremendous crisis on your hands. But I think that's what the Fed really has created here. The narrative that we're getting from the financial media is that it's about Trump and trade. And so many of the comments are about Trump this and Trump that. And really, the core of it all, the essence of it all is the central bank, the failure of money, money printing, and the failure of using dilution of currency as a way to “stimulate” your economy. It's never worked. It's a complete fraud the way these systems are run and it's time for a new monetary system.

Mike Gleason: Yeah, I couldn't agree more and very well put. The next several years, figure to be very, very interesting, indeed. And we'll see how will that all transpires and unfolds and look forward to having you back on to dissect it more. We'll leave it there for today.

I thank you very much for your time and for coming back on and for sharing your insights. And I look forward to talking to you again down the road. Have a great weekend and take care, David.

David Jensen: Thanks Mike. It was my pleasure.

Mike Gleason: Well that will do it for this week. Thanks again to David Jensen of Jensen Strategic. You can follow David on Twitter @RealDavidJensen, be sure to check that out.

And check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend, everybody.