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The End of Silver Leasing?

For the past month, all eyes in the metal world have been focussed on silver lease rates. And for good reason, as the 30 day lease rate has risen from 0.5% to as much as 30% (all figures APR). That's a 60-fold increase, or 6000 percent. That's not normal. As I've tried to point out, that very extreme movement, never seen in any other type of loan (except precious metals), should alert you that there is something very wrong in such unheard-of interest rate changes. Silver lease rates went from being the lowest interest rates in the world, to the highest, in the blink of an eye. Today, I will attempt to make the case, once again, as to why silver leasing is inherently fraudulent and manipulative. And stupid beyond belief. But among all things that leasing may be, it is the silver investor's best friend. Above all things, leasing is the single most important factor in the silver market, and any investor in silver would be well advised to try to put it into proper perspective.

I look at a lot of things when trying to analyze the silver market. Recently, I have written about the Commitment of Traders Report (COT). Unfortunately, since my last update, the technical hedge funds have covered their short positions, and the dealers have gone short again. This gave us the lift in price, as expected, but that lift is now history. If all things were equal, there would be no question in my mind that the move was over, and back down we go. That may be how it still plays out, but let me be clear - all things are definitely NOT equal. Silver Lease Land is in turmoil. Make no mistake about it, the COTs and silver leasing are two separate and distinct entities. One is paper and one is physical. When things are quiet in leasing, the COTs rule the day. When leasing starts to act up, we must pay attention, because, then, physical always trumps paper.

I have written longer and more about silver (and gold) leasing than anyone in the world. I confess, it's just about all-consuming to me. I also confess to something else, that may surprise you - I think I have been a failure at my mission from day one on the Internet, to explain and expose the fraud and manipulation of silver leasing. I honestly thought that the very first "article" that was published on the Internet, would be my only and last article. (The article was a letter that I sent to the US Fed and Treasury - http://www.gold-eagle.com/gold_digest/butler414.html ) Call me naive, but I genuinely thought that by me just explaining what leasing was really all about, that would be enough to end this corrupt process. After all, that letter represented 10 hard and long years of searching and analyzing and thought process into the question of why the deficit in silver wasn't resulting in higher prices, as it must and should. Needless to say, I was very much mistaken, and to this day, the vast majority of financial people (even my closest confidantes) don't fully comprehend the basics of silver leasing. I admit - it's not the easiest subject to comprehend.

Why wasn't I able, then and now, to shine the light of truth and illumination upon leasing to the metal world? Why do observers marvel at changes in silver lease rates, but stop short of seeing the fraud and manipulation that I so clearly see? I think the answers have to do with basic human nature and conditioning. Whenever you have a financial practice in which the leading firms in the world involve themselves, that practice, automatically, gains an aura of respectability. Additionally, when that same practice is labeled with a basic word that everyone understands, in this case, leasing, the deception is complete. What transpires in silver leasing bears no resemblance to the common understanding of the word.

I'm not going to rehash everything I've written about leasing here and now, as I've written numerous articles about it. (Here's a primer - http://www.gloomdoom.com/03-13-01.html ). But let me say this - the firms who I believe are involved in these transactions, like Goldman Sachs, JP Morgan Chase, AIG, HSBC, and the Bank of Nova Scotia, et al, are clearly involved in a criminal enterprise. This is in addition and in conjunction with their criminal activities on the COMEX, where they continue to manipulate the price by violating speculative position limits. I believe that when silver leasing ends, not only will these firms be liable for massive civil and regulatory reparations, for manipulating the price of silver for more than 15 years, but significant jail-time will also await the individuals responsible for perpetrating the leasing scam.

But we've been through this before, so let's turn instead, to the title of this article - the end of silver leasing. Before discussing whether the nutty experiment of silver leasing is ending now, let's review for a moment why I claim that this is, or will be, the most momentous event possible in the silver market. Remember, we have had a documented structural deficit in silver ( more current consumption than current production) for more than 12 years (I say the real deficit stretches back 60 years). Basic economics dictates that every year, or every day, of a commodity deficit, that deficit must be balanced by withdrawals from existing inventory. There is no exemption from this most basic rule of economic reality. The only question is the size of the existing inventories, and the willingness of the owners of that inventory to part with their material at current prices.

In silver, there are two types of remaining world inventories - those which can be leased and those that can't be leased. Stated differently, one type of silver inventory is responsive to an interest rate, while the other type is responsive to a price per ounce. For 15 years, it is the type of silver that is lease rate sensitive that has been coming to market, satisfying the deficit (averaging 150 million ounces, per year, for the past decade). This, alone, explains how we could have a deficit for so long, with inventories dropping, and still have no increase in the price of silver. Price-sensitive silver wasn't coming to market - interest rate-sensitive silver was coming to market. This is key to understanding silver.

Now, common sense will tell you that there is a lot less "lend able" silver in the world, than there is regular, or "non-lend able" silver. That's because, in the real world, the vast majority of silver owners value their holdings and buy/sell decisions on the price per ounce. That's normal. But, some silver owners (like the Central Bank of the Philippines) only care about an interest rate. While I say that's not normal, the fact is that some holders sell their silver for an interest rate. They may call it "leasing" but we know it is really selling. And the crazy thing is, these interest rate silver "sellers" don't even get the proceeds of their sale, just an interest rate. And up to the beginning of December, the interest rate that the silver lessors got for their "sales" was 0.5% per annum. I'm not making that up - until recently, and for 95+% of the time, for the past 15 years, the lenders of silver only received less than 1% per year interest for giving their silver away. I know it's crazy and hard to believe, but you have my word that this is true.

But the interest rate on silver is no longer 0.5% per annum, it's at 20% or 30%. In other words, the interest rates on silver went from being the lowest in the world, to the highest in the world. In weeks. (If that doesn't signal that there is something very wrong with leasing, nothing will). What does that unprecedented change mean? Well, aside from the obvious answer that there is more demand than supply for leased silver, it may be signaling something much more important. It may be signaling the end of silver leasing altogether. I say may, because no one can be sure that silver lending is ending now. But, I can guarantee to you this - silver lending must end someday soon. Must is a pretty strong word, let's see if I can back it up.

It is precisely because there is a lot less lendable silver inventory left, compared to normal, price-sensitive silver (which isn't so big in its own right), and because we know that it is the lendable silver that has been coming from inventories to feed the deficit, that we will run out of this lendable silver long before we run out of all silver inventories. That is beyond question. Therefore, when we see a sudden and shocking increase in the "price" of lendable silver, i.e., the lease rate, it is reasonable to conclude that we may be at the bottom of the lendable barrel of silver supply. Even if this is not the precise time of exhaustion of the lendable inventory, so what? That will be knowable only with the passage of time. What we do know is the lendable supply will run out long before the non-lendable inventory. I am saying that because we know the lendable supply will run out well before the non-lendable supply, we must treat any credible sign that the lendable is all gone, as THE sign. Why?

Why must we treat any sudden jump in lending rates as the sign that the end is here? Because once the lendable stuff is all gone, we must switch over to the other type of silver inventory, the normal price-sensitive kind, in order to satisfy the deficit. Again, I'm using the word, "must". And here's the catch, so pay attention - the day, no, the minute we make this inevitable switch-over, we change radically how we draw the inventory out. Remember, two types of silver inventory. Two types of pricing. One responds to an interest rate, and the other responds to a price per ounce. When we use up the interest rate kind, we must draw out the other type with a price. A high price. A shockingly high price. All of a sudden, when the lease rate doesn't matter, the price per ounce matters. And this happens the second we run out of lendable stuff. It is a paradigm shift.

Please allow me to dwell on this point. Either the lendable inventory supplies the material for the deficit, or the non-lendable inventory does. It is black or white. For 15 years, it has been the lendable inventory that has satisfied the deficit. This is the fraud and manipulation that I have written about for years. But we know, beyond question, that lendable inventories will run out before non-lendable inventory. That may be now, judging by the extreme changes in lease rates. And when extremely high lease rates suck the last ounce of silver from the lendable inventories, the market must then go after the non-lendable inventories, the regular inventories, the kind regular people own. And regular owners of silver, unlike the stupid central bankers, are interested in a high price for their material, not a stupid lease rate.

The crazy thing about silver leasing is that it only works with stupidly low interest rates, 1% or so. Once it goes higher, what little "economic justification" there appears to be in metal leasing, disappears completely. Remember, the vast majority of silver leases are of the 30-day variety, meaning most silver leases made in the past 15 years must be settled, or rolled-over, every month. So the current high rates (20% to 30%) are rolled over at the current rates. Yes, that means that all the borrowers of silver, old and new, must pay the new rate. Even if the new rate is 20 to 30 times what you were paying. Your only other choice, as a borrower, is to buy silver in the open market and pay off the lease. That hasn't happened. Yet.

So, what am I really saying now, about the price of silver? The honest answer, short term, is - I don't know. Yeah, silver is better than ever on a long term basis. It is even more of a sure thing. But, what bothers me, is that the crooked dealers (mentioned above), have re-shorted the 200 million naked paper ounces that they shorted after the 9/11 rally. My complaints about manipulation and position limit violations were for naught. These crooks act like they are above the law. For sure, COMEX management and the CFTC are on the side of the crooks. Right now, it depends on whether a sizable chunk of silver can be found from some lender. This would take the pressure off temporarily. If the crooks get their way, we're going down to $4, or lower, in price. But, not for long.

But, you must understand the situation. The COMEX crooks can only sell paper contracts. They obviously don't have the real thing, otherwise they wouldn't be paying 30% to borrow it. In doing that, they are handing you an opportunity of a lifetime. They are severely depressing the real price of silver, via leasing and paper short sales. Yeah, they may succeed in knocking silver down one more time. That is out of our control. But they can't manufacture real silver, like they manufacture paper silver. This market rig-job of theirs, just might blow up in their faces. Then, we are on our way to truly scary prices on silver. Real silver owners are going to get the financial shock of their lives. They will wake up one day to a price of silver, so high, they will disbelieve it. It will feel the same, but it will be better than winning the lottery, because it's not pure chance, it was based upon common sense and positive individual action. This leasing scam has vastly accelerated the evaporation of silver inventories. That makes leasing your best friend. In the final analysis, physical always trumps paper. Your duty, as an investor, is to play the game on your terms, not their terms. Buy what they don't have, and can't manufacture. Buy real silver.

Ted Butler

January 10, 2002

 


 


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