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The movie was childish, zany, gross and moronically hilarious.
OK, I admit it - I loved it. There were just too many funny skits
to recall all, but the dead bird repaired with scotch tape, the
snowball fight and the scene where the bad guy finally gets the
return of the suitcase with the million dollars stand out. As the
suitcase is opened, only to reveal scores of pieces of scrap paper
upon which are written amounts and notations as IOU's for the money
that was stupidly squandered by the two idiot protagonists, one,
Jim Carey, seriously explains that they're good for the money and
the chits should be handled with care - especially the one for the
car that they spent $250,000 on. The humor was in the absurdity
between the sincerity of the promise of repayment with the likelihood
of its fulfillment. Even if you haven't seen the movie, if you try
to picture the scene of the pile of worthless paper being passed
off as dollar equivalents, you will have an insight few possess
in analyzing the most bizarre financial instrument ever devised
in the precious metal world - the metal lease/forward loan. While
the comparison between a slapstick comedy and financial instruments
with outstanding values measured in the tens of billions of dollars
might seem far fetched, I ask you to reserve judgment and decide
for yourself.
If you have trouble picturing important financiers, central bankers,
executives of major mining companies (along with most of their investors),
analysts and commentators of the precious metals world, along with
market regulators being compared to the nitwits in the movie, I
can understand.
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Perhaps
they are all not stupid, but it is my contention that the
very principle of the precious metal loan/forward sale is
dumber than dumb. For 15 years, we have witnessed two of the
world's most important markets, gold and silver, distorted
beyond reason by an idiotic premise enthusiastically embraced
by people who should know better.
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What are metal loans/forward sales? While there can be variations,
simply put, they are devices intended to allow the owners of gold
and silver (mainly central banks and other government entities)
the ability to earn interest on their metal and the borrowers (mainly
mining companies, but increasingly, large speculators) the access
to cheaper money and/or better deferred prices than available from
conventional sources. On the surface, they look and work just fine.
The central banks are receiving interest (1-2% annually) on assets
that never in history before 1980 yielded any return. The mining
companies have been given such favorable terms that some have responded
by selling forward years of future production. Now even large hedge
funds have responded to these magical lease creations by borrowing
and selling short thousands of tons of gold and silver. Giant financial
institutions and bullion banks provide capital, expertise and guarantees
to facilitate incredibly complex deals. There can be no doubt that
this is big business. Dumb, but big.
How did these loans/forward sales come about? About fifteen years
ago, some enterprising Wall Street commodity guys at a very prestigious
investment banking firm came upon the idea that would appear to
satisfy the desires of a good number of potential clients with what
promised to be very lucrative personal returns in the form of new
fees. The idea proved popular beyond belief because it seemed to
give the two chief principals to the transaction, central banks
and mining companies, offers they couldn't refuse. To central banks
and other government entities with large unproductive stockpiles
of precious metal, the transactions offered an interest rate and
unexpected cash flow for the "lending" of their metal. And
best of all, since they were "loaning" metal, not selling
it, the central bankers didn't have to report the transactions -
they could just receive the income while carrying the metal on their
books as if it were still in their possession (since there was no
question they could get their metal back at any time). The mining
companies, in turn, could report to their shareholders high deferred
prices, increased cash flow and protection from falling prices.
The investment bankers, of course, did the best of all. This is
dumb?
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No,
this isn't just dumb - this is the dumbest (or most crooked)
type of financial transaction ever conceived and embraced
in history (although portfolio insurance and dynamic hedging
are close). Metal loans/forward sales even overshadow Ponzi's
scheme and lasting legacy, since the participants, scope and
duration of the metal leasing scam outpace, by far, the original
stamp con or any variation since. Let me explain why.
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Metal loans/forward sales are dumb because metal can't pay interest.
Gold and silver are inert materials that you can't convert to pure
income producing assets. Yes, I'm aware that you can sell options
for what is called income or arrange for a deferred sale with a
built in enhanced price that might be based on current income assumptions,
but in the end, these are just contingency sales. Metals can't pay
interest because they are not an IOU or a liability, they are elemental
substances. They have no utility value other than consumption or
sale. Metals can't be "rented" like a car or house. It does
a borrower no good to simply posses metal that is owned by another
party. That's one reason why metal loans are dumb - the borrowers
don't want the metal, they want the cash that they get when they
sell the borrowed metal. And make no mistake, every single metal
loan/forward sale, with no exception, begins with the actual sale
of the borrowed metal. This indispensable first step of a central
bank's borrowed metal being sold is dumb because the owner doesn't
receive the proceeds, the borrower does. Think about that - the
metal physically leaves the central banks' vaults, is sold on the
open market, and the proceeds of the sale is not held by the central
bank. This is not a joke, trick, nor a stupid movie plot, this is
what happens in every single metal loan/forward sale. Of course,
the central banks receive something in return - an annual interest
payment of 1 or 2 per cent and a paper promise of the return of
their metal. But, if you use a little common sense, and think this
through, you'll see that Jim Carey's promise of repayment in the
movie is better than the promises of metal repayment given to the
central banks.
Yes, that's what I said - the bad
guy in the movie has better statistical odds of being repaid the
squandered million dollars than the central banks do of being repaid
their gold and silver loaned out. Why? Because the nutty characters
in the movie could conceivably hit the lottery or inherit a windfall,
but the central banks don't even have that hope, there is no possible
way they can get their metal to be collectively returned. That's
because of the inherent dumbness of metal loans. You see, the only
way even a cockeyed idea like metal loans/forward sales could have
persisted for as long as it has, is because there is, and has been,
a pronounced deficit in the real supply/demand of gold and silver.
If there were not an ongoing shortfall between production and consumption
in gold and silver, metal loans/forward sales could not possibly
exist. Please think about this carefully, as it is the key to deciding
the legitimacy of these transactions. What I am saying is that the
real physical release of metal, in enormous quantities, onto the
markets that metal loans undoubtedly involve, could not possibly
be absorbed in an orderly manner unless the markets were desperately
short of supply. It is the persistent uneconomic dumping of precious
metal via loans/forward sales that has created the gold and silver
deficits, satisfied the deficits, and controlled/depressed the price
for all these years. The metal flooding the market from these loans
has depressed prices, in turn discouraging production and increasing
demand, thereby escalating the deficits and increasing the dependence
of the markets for more gold and silver from the central bank loans.
It's a vicious circle. Do you think it's just a coincidence that
metal loans/forward sales have existed for precisely the same time
as the 15 year bear market in gold and silver, while the real deficits
in those markets have been exploding? How else would a reasonable
person explain, for instance, how silver could remain comatose in
price while stockpiles are evaporating and the real deficit reaches
the insane level where total consumption exceeds total production
by almost 40%?
Which leads us back to our dumb central
bankers and the metal they're never going to recover. For if these
metal loans have created this distorted current situation in gold
and silver of severe shortfalls and depressed prices, as I've tried
to convince you, what's going to happen when this stupid business
ends? And make no mistake, it will end. Then the market will be
faced with accommodating a real shortage the only legitimate way
known - by price rationing. Unfortunately, there can be no way possible
that years of distortion of the laws of supply and demand can not
end violently. Can you picture a scenario where the market struggles
mightily by adjusting the price to discourage consumption and increase
production once the central banks cease their manipulation, that
could allow the repayment of the loaned metal? It doesn't matter
what their loan covenants dictate, the metal that has been loaned
for 15 years by the central banks is gone, consumed or dispersed.
And as far as future production from the mines who have pledged
same for repayment, forget it. You see, when the central banks awake
from their stupor and stop giving away their metal for free, the
supply side of the ongoing metal fundamentals will develop an immediate
vacuum. If you think on top of that (remember we're talking about
the instant removal of 30-40% of total supply), the market would
permit the remaining lion's share of supply (mine production) to
bypass 6 billion consumers and simply be returned to the central
banks, it's time see the movie again. There is no way the central
banks (aside from the first few who panic and call in their loans)
can get their metal back. Maybe some type of paper settlement, but
definitely not metal.
I am not going to elaborate on the
stupidity of those in the mining community and regulatory circles,
except to say that if the mining world had not partnered with the
central banks in this hare brained scheme (apologies to all rabbits),
and sold years of production forward, prices would be nowhere near
current complained about levels. And on a true price spike, legitimate
hedges could then be transacted. As it stands now, when the markets
explode, because so much future production is already sold, there
will be weeping and gnashing of teeth in the mining world, where
there should be joy. To the regulators, congratulations on blowing
another one.
I would have thought the inherent
fallacy of the "leasing" of a precious metal (or any basic commodity)
would have been exposed to all with the failure of the platinum
and palladium lease market nearly two months ago. While all the
talk of default and the Dresdner Bank's pleas for US taxpayer bailouts
have disappeared from print, we still see quotes of 20 to 80% for
loans where 2% was the norm (remember, metal loans are supposed
to be lower than all other rates because there is no inflation risk
- metal is replaced with metal). If the rates on bank or government
loans or debt increased 10 to 40 times the prevailing rates in a
matter of weeks, would that not alert all that something was seriously
wrong? That the central banks choose to ignore such a clear signal
that things are amiss in the world of metal lending is amazing.
I guess they won't get it until they have loaned out the last ounce
of gold and silver. I might as well end on a mixed movie metaphor
- stupid is, as stupid does.
Ted Butler
August 16, 1997)
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