by Ted Butler, Silver Seek:
I am going to describe something that, upfront, I know you will likely find far-fetched and will have trouble believing, even after you think it through. Nonetheless, I respectfully request that you persist in trying to grasp what I’m about to describe because if you do you will come to understand something that took me ten years to grasp on my own.
I ask you to imagine that you own an apartment that you rent for income purposes. Your tenant, unbeknownst to you and without your permission, turns around and sells your apartment to an unrelated third party and pockets the proceeds of the sale. Of course, upon learning of this fraudulent transaction, you would take every legal means, including contacting law enforcement officials to undo and rectify the situation.
While I’m sure you would agree that what I just described was so outrageous as to be almost unbelievable in its audacity, what I just described is how precious metals leasing works – with the exception being that the original lender and owner of gold or silver knows its metal will be sold to a third party and that the original owner will receive none of the sale proceeds, just a tiny rental income and a promise for the metal’s return someday.
Long-time readers know of my discovery of silver price manipulation by concentrated short selling on the COMEX around 1985, following a challenge from my now departed friend and silver mentor, Israel Friedman. Izzy had asked me to explain how silver could be depressed in price, to around $5 at the time, despite being in a documented physical deficit, where the world was consuming more silver than it was producing. It took me a year to come up with the explanation, and remarkably, that same explanation still applies today.
What long-time readers may be less aware of was my struggle to uncover, even after discovering the mechanism which depressed prices in the face of a physical deficit, how sufficient physical metal was coming to market to balance the deficit and sustain artificially low silver prices. Where it took me a full year to uncover the COMEX short-selling mechanism, it would take me more than a decade – ten long years – to uncover how enough physical silver was coming to market to satisfy the documented shortfall between production and consumption.
I won’t get into the details, but this was a very trying time for me and, particularly my family, as I was, quite literally, consumed with the puzzle of how enough physical silver was coming to market in sufficient enough quantities to satisfy what was an obvious ongoing shortfall. I tried to put it out of my mind and go on with life in other ways, but just couldn’t – it was an enigma and intellectual challenge from which there was no escape. All along, I read and contemplated everything I could related to silver. Therefore, I knew it wasn’t plain vanilla selling from investors that was satisfying the ongoing physical silver deficit, but I couldn’t put my finger on what the actual source of the metal was.
Then in the mid-1990’s, it dawned on me what the explanation was for the continued flow of physical silver that was coming to market in the face of super-depressed prices. I had been reading about the leasing and forward selling of gold and silver involving central banks, bullion dealers and mining companies, but like most people, I wasn’t quite sure what this leasing and forward selling was all about. Then one day, it all clicked in.
The central banks, with vast holdings of gold (and some holding silver as well) had been convinced by the Wall Street and London bullion banks to deploy a portion of their vast holdings which was just sitting in their vaults gathering dust. The central banks couldn’t just sell their gold and silver outright as that would require full disclosure, so the bullion banks hatched up a scheme circumventing straight sales of metals and convinced the central banks to lease their metal for a low interest rate. The central banks, relieved of the obligation of having to report the sale of their metal, were more than happy to physically part with the metal leased out in return for a paltry income under the reasoning that some return was better than no return.
Completing the scheme, the bullion banks then persuaded a number of large mining companies, like Barrick Gold and AngloGold to agree to forward sales, which in essence were agreements by the miners to receive the proceeds of the sale of the central banks’ leased gold and silver for promising to return the metal someday from future production at the then current price. In essence, the central banks rented their gold and silver (their apartments) for a small rental income and then watched as their metal was sold by the tenants (the mining companies) while the tenants pocketed the proceeds of the sale and promised to return the metal (apartments) someday – all overseen and guaranteed by the bullion banks (yeah, including JPMorgan).
While the whole precious metals leasing scheme was as cockeyed and fraudulent as I’ve just described, it was also as real as rain for many years and allowed tens of millions of gold ounces and hundreds of millions of silver ounces to, in effect, be dumped on the market, keeping a lid on prices and balancing any physical deficit in silver. When I thought it through and discovered how wacky and fraudulent the whole business was, I did my best to alert everyone that what was transpiring was simply not only crazy but manipulative to gold and silver prices.
It was about that time that I became introduced to the Internet and the first or one of the first things I published on the Internet was a copy of a letter I sent to Alan Greenspan, Chairman of the Federal Reserve and Robert Rubin, US Treasury Secretary, about precious metals leasing 23 years ago. While I did receive replies from both Federal Reserve and Treasury officials, metals leasing persisted.
I also wrote to every regulator I could think of, including the SEC and CFTC, as well as Barrick Gold and its auditors, Price Waterhouse – all to no avail. I warned them that precious metals leasing was artificially depressing the price and would end up costing billions in losses. Eventually precious metals leasing/forward selling blew up in the practitioners’ face, as it had to, with both Barrick and AngloGold losing $10 billion each and other mining companies many billions more because, essentially, this leasing was little more than undisguised and unlimited short selling.
Leasing’s end ushered in and was largely responsible for the bull markets in gold and silver that lasted into 2011. However, it wasn’t that leasing died some type of dramatic death where the regulators came in and declared it as fraudulent – the players just lost too much money and it ended on an ignominious note – best forgotten and hopefully never to return.
So why have I subjected you to this walk down the memory lane of precious metals leasing? Because the beast has returned from the dead, only this time with a different purpose and intention. Before I get into what’s driving the rebirth of precious metals leasing, please allow me the opportunity to explain why it is inherently fraudulent and why many can’t see the fraud. Again, I’m not chastising anyone who can’t see it, after all, I just confessed that it took me a full decade to grasp it.
The main problem is with the word “lease”. We all know what a lease is and it would be rare if any of us hadn’t been involved in renting or leasing a car or an apartment or in leasing an apartment or house to others. Leasing is an integral component of modern life and all manner of real estate as well as every type of train, plane, automobile or piece of equipment is leased regularly.
The underlying commonality of all these things is that they are useful assets that are expected to be constructively used and returned in time. Even where use results in wear and tear (cars, planes and equipment) as opposed to real estate, the lease payments would reflect that (as anyone paying extra mileage charges on a leased car would attest).
Now, think of a bar of gold and silver, neither of which are useful assets in the sense of the assets typically leased as indicated above. You can’t drive a bar of gold or live in a bar of silver. The only “useful” purpose for a bar of gold or silver is to convert it into cash by sale or, in the case of jewelry or industrial consumption, to convert or destroy the bar. No one is going to borrow a bar of gold or silver simply to hold those bars and leave them intact. The only value to a bar of gold or silver is to sell it to someone else or convert it into some other form, essentially destroying the bar – but neither of those uses is consistent with our understanding of the word “leasing”.
Therefore, the whole concept of precious metals leasing is absurd. Once it dawns on you how absurd the concept is, then you can advance to understanding what’s really going on, which is something entirely different from what one thinks when hearing the word leasing. About the closest true comparison of what precious metals leasing really represents is short selling in the stock market, where stock is borrowed from an owner and the borrower then sells the security to an independent third party. Because the borrower isn’t the real owner of the securities sold, the transaction is required to be recorded as a short sale.