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The Fraud of Negative Gold/Silver Lease Rates

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Experienced precious metals investors are familiar with the topic of “negative lease rates” for gold and silver bullion. However, even novice investors can infer what is being discussed: paying someone to “borrow” gold/silver bullion.

In general, any time we contemplate a situation where lenders are paying borrowers to borrow, the word “dump” immediately comes to mind. This is because we begin the scenario with a lender choosing to enter into a transaction with the deliberate outcome of losing money. Because the world of commerce is entirely devoted to earning profits rather than creating losses, this automatically also implies market-manipulation – and thus fraud.

It is with this general context that we can now look at the particular subject of the gold and silver markets, where lease-rates are now usually negative (and are negative again currently). With negative lease rates creating a prima facie presumption of manipulation and fraud, the issue then becomes whether the particular fundamentals of the gold and silver markets either support or refute that presumption of fraud.

The easiest way to approach this issue is by asking ourselves a question: are there conditions where it might make some crude “business sense” to enter into a transaction with the deliberate intent of losing money? This is ultimately a fairly simple question to answer since when we examine any market, we quickly discover that it is very difficult to construct even hypothetical circumstances where it would make sense to lease that asset at negative prices (other than illegal/nefarious purposes).

The immediate proposition we must confront is that the moment we separate ownership of an asset from possession of that asset that we impair our ability to sell the asset; we are intentionally “encumbering” that asset by lending it to a 3rd party. This is problematic with respect to any-and-all price behavior in a market.

If prices are rising, we don’t want to encumber our asset; since it impairs our ability to take profits (through a sale) – and incurs further losses at the same time through losing money on the lease transaction. The situation is even more adverse with respect to a falling market, since prudent asset-holders would want to retain maximum liquidity with that asset should the need to sell the asset (to cut losses) arise.

Even in a flat market it makes no sense to engage in losing transactions via negative lease rates. By definition, a flat market implies “dead money”: an asset generating no profits (nor even deductible losses). Should a party be forced to hold a “dead” asset like this (for instance the gold reserves of central banks), while it would make sense to lend-out their gold for very minimal profits (i.e. slightly “positive” lease rates); it would never make sense for these asset-holders to lend-out their bullion at a loss.

With there never being price conditions under which it makes sense to lease bullion at negative rates, this leaves us only one more variable to consider: inventories. If the (changing) value of an asset is never a valid basis for choosing to lose money by lending gold/silver at negative rates, then maybe the quantity of an asset being held would be a valid determinant?

 

Here (at last) we encounter a scenario where it might be possible to argue that one had a valid reason for leasing an asset at negative rates. The obvious scenario is where one’s inventories were totally bloated. There are “business costs” associated with storing physical assets. If the vaults of the bullion banks were overflowing with gold and silver, then one might be able to understand these institutions literally “giving away” their gold and/or silver to clear storage space.

There are two enormous problems with this (potential) theory. First of all, with gold and silver having been in a 10+ year bull market; it would be absurd for asset-holders to pay people to borrow that asset from them when they could simply sell it at a profit instead. However, there is a much stronger objection to this theory (especially today): silver and gold inventories are rapidly falling.

We’ve known this with the silver market for more than 20 years, since the Great Collapse in silver inventories began in 1990. Between 1990 and 2005; silver inventories plummeted by 90% -- from over 2 billion ounces down to roughly 200,000 ounces. Since 2005, we have lost access to any reliable inventory data on the silver market, as inventory numbers have been falsified through perverse manipulation of supply/demand data.

We can only assume that this deception is expressly intended to hide the fact that silver inventories are continuing to collapse. This suspicion is reinforced by a stream of anecdotal reports that with all large-scale purchases of physical silver:

a) Buyers are being forced to wait extended periods to take delivery.

b) When they receive delivery, all of their stock is comprised of newly-refined bars.

Both these factors suggest a market stretched to the breaking point. It utterly defies rationality that in such a market that silver-holders are paying people to borrow their silver.

The situation used to be considerably more complex with the gold market. Because gold is an asset whose prime function is as (the world’s best) “money”; it is a commodity which (unlike silver) is perfectly conserved by our species. That is, the vast majority of every ounce of gold ever mined by our species could (theoretically) be collected (i.e. purchased). Of course on a practical level much of this gold is in the form of cultural artifacts and/or priceless heirlooms – and thus would/could never come onto the market as “bullion” at any price.

Nonetheless, the picture in the gold market used to be much more ambiguous with respect to inventories. Going back only a few years,  the world’s largest (official) holders of gold bullion – the world’s central banks – were both buyers and sellers of bullion, and (for many years) primarily sellers.

That has dramatically changed. Central bank gold-sales totally ground to a halt as of 2009. By 2010, the central banks were net-buyers for the first time in decades, and in 2011 these banks bought more than 458 tons of gold – and are currently accumulating gold reserves at the fastest rate in history. Gold inventories are clearly declining, and thus any legitimate excuse for negative gold-leasing has evaporated with those sales.

This analysis can’t be concluded without at least briefly considering the motives of the borrowers of this gold/silver bullion. While lease rates are “negative”, no one could ever get rich off of merely borrowing the gold or silver. Since there is no utility in simply holding a (borrowed) asset, it is clearly being used directly/indirectly for trading purposes.

Specifically, the two reasons for borrowing bullion would be to post it as collateral in order to leverage one’s trading – expanding the total “supply” of bullion on the market (‘paper bullion’ and real bullion); or to short it onto the market with the expectation of being able to make a profit, buy it back (at a lower price), and then return the bullion to the lender.

Note that borrowing gold and silver for the purpose of shorting it – during a 10+ year bull market – makes no sense whatsoever, and so we can classify borrowers as being either “suicidal” or “berserkers”, being used by the bullion banks to take-down the market (and most likely being secretly indemnified for their large/serial losses).

These are purposes which can only have a depressive effect on prices (one way or the other). Putting this together, we have gold and silver lenders paying borrowers to take their bullion, when there could be no possible (legitimate) purpose for engaging in such transactions – and where the only possible intent of such lending is to depress bullion prices.

Just another “day at the office” for the fraudulent Banking Cabal.

 

 


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Jeff Nielson
...
written by Jeff Nielson, September 30, 2012
Here is our latest defeat.
This pimp judge just struck down the CFTC position limit rule.

http://www.businessweek.com/news/2012-09-28/cftc-rule-restraining-speculation-rejected-by-u-dot-s-dot-judge

Blythe and the boys must be popping magnums of Crystal.



Yes Bobbbny, unfortunately you are totally correct here. This was (another) massive defeat for Truth and Justice.

This ruling was totally perverse. In fact the entire EXPLICIT purpose of this provision in the Dodd-Frank window-dressing was intended to LIMIT position sizes -- commencing no later than January 1, 2011. Obviously this judge is yet another corrupt liar within the U.S. judiciary, and thus likely in line for an imminent promotion...


smilies/angry.gif
bobbbny
...
written by bobbbny, September 28, 2012
Here is our latest defeat.
This pimp judge just struck down the CFTC position limit rule.

http://www.businessweek.com/news/2012-09-28/cftc-rule-restraining-speculation-rejected-by-u-dot-s-dot-judge

Blythe and the boys must be popping magnums of Crystal.
Jeff Nielson
...
written by Jeff Nielson, September 16, 2012
Jeff: my take on this issue is that the negative lease rates most likely indicate that the asset so leased appears only on the books and doesn't truly exist. Accounting fraud is the standard M.O these days. Let's say A leases a bar to B who then leases it to C and then to D, etc. I surmise that in true Madoff fashion, all of these entities "claim" a leasehold interest in that same bar. Can we say "fractionalization" and "hypothecation"? So "negative" has no real effect; 0 times -5% is still O. Your thoughts?


Apberusdisvet, you're one step ahead of me. Yes, the subjects of WHERE all this leased gold came from, and WHERE it all ended up are a topic unto themselves. Indeed, I was specifically pondering whether to do a commentary on that subject -- as a sequel to this one.

The only downside to such a commentary is that it would (unavoidably) be more speculative. We can illustrate that there is no valid purpose to negative lease rates in OBJECTIVE terms. However, we can only infer/insinuate what may be a far larger scam regarding the actual leasing itself.

Specifically, since the party leasing the gold (or silver) still gets to claim OWNERSHIP (without possession); this is another way for the bankers to play their leverage games -- where they 'have their cake and eat it too.'

On the one hand (as you say), they claim title to vast quantities of gold which may not physically exist in their own vaults. At the same time, they get to dump that gold on the market -- and at a subsidized price (i.e. the negative lease rate).

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apberusdisvet
...
written by apberusdisvet, September 16, 2012
Jeff: my take on this issue is that the negative lease rates most likely indicate that the asset so leased appears only on the books and doesn't truly exist. Accounting fraud is the standard M.O these days. Let's say A leases a bar to B who then leases it to C and then to D, etc. I surmise that in true Madoff fashion, all of these entities "claim" a leasehold interest in that same bar. Can we say "fractionalization" and "hypothecation"? So "negative" has no real effect; 0 times -5% is still O. Your thoughts?

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