In Ted Butler's Archive

The End of Silver Leasing?

By Theodore Butler

(The following essay was written by silver analyst, Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be accurate.)

For the past month, all eyes in the world of metals have been focussed on silver lease rates. And for good reason; the 30 day lease rate has risen from 0.5% to as much as 30% (annualized). 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 something is wrong with such unheard-of interest rate changes. Silver lease rates went from being among 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, manipulative and stupid beyond belief. But for all the things that leasing may be, it is the silver investor’s best friend. That’s because leasing is the single most important factor in the silver market and any investor in silver would be well advised to understand it.

I look at a lot of things when analyzing the silver market. Recently, I wrote about the Commitment of Traders Report (COT) that discloses transactions on the commodity futures market. Unfortunately, since my last update, the technical hedge funds have covered their short positions. This gave us the lift in price, as expected, but that lift is now history. The dealers have also gone short again. Normally that means the move is over, and back down we go. That may still be how it plays out, but at this time, silver leasing is in turmoil. Silver futures and silver leasing are two separate and distinct entities. One is paper and one is physical. When things are quiet in leasing (the physical market), the futures (paper market) rule the day. When leasing starts to act up, we must pay attention, because the physical invariably trumps the paper.

For years I have written more about silver (and gold) leasing than anyone in the world. I confess, it’s been all-consuming to me. I also confess that I think I have been a failure to explain and expose silver leasing. I once thought that the very first “article” that I published on the Internet a few years ago would be my last article on the subject. Call me naive, but I genuinely thought that by explaining what leasing was all about, that would be enough to end this dubious practice. After all, that letter represented ten long years of searching, analyzing and thinking about why the deficit in silver wasn’t resulting in higher prices. Needless to say, I was mistaken, and to this day, the majority of  people who own silver still don’t fully comprehend the basics of silver leasing. I admit – it’s not the easiest subject to understand.

Why haven’t I been able to shine the light of truth upon leasing in the metals world? Why do observers marvel at changes in silver lease rates, but stop short of seeing the manipulation that’s  clearly there? I think the answer is that 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, like leasing, the deception is complete. However, what transpires in silver leasing bears no resemblance to the common understanding of the term.

I’m not going to rehash everything I’ve written about leasing here. I’ve written numerous articles about it. (Here’s a primer – ). 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 in my opinion, committing illegal acts. This is in addition to their unlawful 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 grand jury investigations await the individuals responsible for perpetrating the leasing scam. These are serious charges.

In a nutshell, here’s why silver leasing is inherently fraudulent and manipulative – it is not possible to properly label anything a lease, where the underlying collateral is destroyed and the interest rate is concocted and artificial. In every single silver lease, the metal that is supposed to be the collateral is either sold to an unrelated third party, or consumed by the borrower. The collateral in every single silver lease goes “bye-bye” at the outset of the “loan.” So much silver has gone “bye-bye” since the inception of this wacky instrument (one to two billion ounces), that there is no way it can be repaid. We have less than 150 million ounces of verifiable silver bullion left in the world, with obligations to repay 1 to 2 billion ounces in these loans. If that’s not fraud then it’s insanity because the silver can’t be repaid. I believe that anyone involved in these loans is practicing fraud. And that includes the lenders, borrowers and middlemen guarantors. All of them. The dumping of silver due to leasing explains why the silver price has been in the doldrums for 15 years.

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 its end will be a truly momentous event. Remember, we have had a documented structural deficit in silver (more consumption than production) for more than 12 years. (I say the real deficit stretches back 60 years.) Economics dictates that every year (or every day) that there’s a commodity deficit it must be balanced from existing inventory. There is no exemption from this basic rule. The only variable is the size of the existing inventories and the willingness of the owners to part with it at current prices.

In silver, there are two types of inventories – those that 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 the key to understanding silver.

The vast majority of silver owners (yourself included) value their holdings and make 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 these holders lease out their silver for an interest rate, to someone who sells it and uses the money. 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? It means there is more demand for leased silver than there is supply. And it may be signaling something far more important, the end of silver leasing altogether. I say may, because no one can be sure when silver lending is going to end. But, I can guarantee to you this – silver leasing must end someday soon. Must is a pretty strong word, but I can back it up.

There is a lot less lendable and leasable silver left, compared to normal price-sensitive silver that people own (which isn’t so big in its own right). We know that the leased silver has been coming from inventories to feed the deficit, and we will run out of this silver long before we run out of all other silver inventories. That’s because price has nothing to do with its sale or liquidation. Therefore, when we see a sudden and shocking increase in the lease rate, it is reasonable to conclude that we may be nearing the end of the lendable of silver supply. Even if this is not the precise time of exhaustion of the leasable inventory, we must treat any sudden jump in lending rates as the sign that the end of leasing is here.

Once the lendable silver is gone, we must switch over to the price-sensitive kind, in order to satisfy the deficit. I’m using the word, “must” because the day, no, the minute we make this inevitable switch-over, we change radically how we draw the silver supply out. Remember, we have two types of silver inventory and two types of pricing. One responds to an interest rate and the other responds to a price. When we use up the interest rate silver, we must draw out the other type with a high price, a shockingly high price. Suddenly the lease rate doesn’t matter. Only the price per ounce matters. The second we run out of lendable stuff we have a paradigm shift.

For 15 years it has been the leasable inventory that has satisfied the deficit. That may be over, judging by the extreme changes in lease rates. When extremely high lease rates suck the last ounce of silver from the lendable inventories the market must then go after the non-leasable inventories. Those are the inventories regular people own. The regular owners of silver, unlike the 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 low interest rates of 1% or less. Once it goes higher the economic justification disappears. The vast majority of silver leases are for 30 days. Most silver leases made in the past 15 years must be settled, or rolled-over, every month. So the current leases are rolled over at the current rates (20% to 30%). That means that all borrowers of silver (old or new) must pay the high rate. Even if the new rate is 20 to 30 times what they were paying the only other choice, as a borrower, is to buy silver in the open market and pay off the lease. That hasn’t happened. Yet.

What’s going to happen to the short-term price of silver? Honestly, I don’t know. Yes, silver looks better than ever and even more of a sure thing. But, what bothers me, is that the manipulative dealers (mentioned above), have re-shorted the 200 million naked paper ounces that they shorted after the September 11 rally. My complaints to the FCTC and COMEX about manipulation and position limit violations went for naught. These manipulators continue to act like they are above the law. For sure, COMEX management and the CFTC are blind to this gross manipulation. Right now, however, the price depends on whether a sizable chunk of silver can be found from some lender. This would take the pressure off temporarily. If the lawbreakers get their way, we’re going down to $4, or lower, in price. But, not for long.

The COMEX manipulators can only sell paper contracts. They don’t have the real thing, otherwise they wouldn’t be paying 30% to borrow it. In doing so 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 as they manufacture paper silver. This market rig-job will blow up in their faces. Then we’ll see truly scary prices for silver. Silver owners are going to get the financial shock of their lives. Those who bought physical silver will wake up one day to a price of silver, so high, they will disbelieve it. Actually it will feel better than winning the lottery because it’s not pure chance, but based on the owner’s common sense and courageous action.

This leasing scam has vastly accelerated the evaporation of silver inventories. That makes leasing your best friend. In the final analysis, physical  silver by its nature must always trump paper silver. Your shrewdest move is to play the game on your terms, not their terms. Buy what they don’t have and they can’t manufacture. When you buy real silver you are taking possession of the actual stuff that industry wants and must have. You are holding what the hedgers and leasers must have to pay back their silver loans. You are in the driver’s seat. Eventually they must pay your price. Frankly, there’s never been a better situation in the history of precious metals. I urge you to buy silver now. It’s still cheap and (thanks to leasing) it can provide you with spectacular gains.

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