In Ted Butler's Archive

By Ted Butler

(From James Cook, President of Investment Rarities: The following essay by Theodore Butler makes claims and arguments that are controversial. Although we have found Mr. Butler to be an accurate analyst of the silver market, we must nevertheless issue a disclaimer about the nature of his comments. These views did not originate with Investment Rarities and though we may agree, we lack the knowledge and insight to make such claims. This is Mr.. Butler’s show and we are conveying it to you without necessarily endorsing these statements.

Mr. Butler makes claims which at first blush appear to be somewhat libelous. He is aware of this but is not overly concerned about possible legal repercussions. We are presenting his statements, but we do not guarantee the accuracy or correctness of these somewhat inflammatory comments.)

Leasing 101 
Recently, it occurred to me that the most important aspect of the gold and silver market, is not understood widely. I am referring to gold and silver leasing. I’ll attempt to define and analyze metal leasing here, but I must warn you – I’m not about to pull any punches. For almost five years, I have raised the issue that the leasing and forward selling of gold and silver is fraudulent and manipulative, and has artificially depressed the price of each. We are talking about some very large and well-known financial institutions who are involved in that fraud and manipulation. I recognize that these are serious charges on my part, and I do not make them lightly.

Allow me to explain myself, in the simplest words I can muster. Keep in mind, I am aware of no establishment voice that confirms my contention that leasing/forward selling of gold and silver is inherently dishonest. I think that is because this leasing/forward selling business has become so entrenched that even those who see the picture correctly, are reluctant to speak up. The only confirmation I seek here is that of the reader’s common sense.

The first thing you must do, in order to understand gold and silver leasing, is to take the word “lease”, and throw it out the window. I believe that the very word is at the heart of the misunderstanding about metal leasing. Because, in gold and silver leasing, what actually takes place bears no resemblance to any other type of lease you have experienced. When you hear the word “lease”, the logical response is that something is being “borrowed” for a fee. At the termination of the lease, that which is borrowed is returned. That’s what the word lease means. There are very few people in the US who have not participated in a lease. It is that ingrained experience, that causes the misunderstanding in gold and silver leases.

The difference between metals leasing and all other types of leasing is the “return” part. We all know that the item being leased must be returned or accounted for. And, to be sure, even in gold and silver leasing there is a stated contractual obligation to return any gold and silver loaned. But, here is where you must rely on your common sense and determine if what I am alleging is true. Something happens in every single gold and silver loan, at the outset of the transaction, that renders the whole concept of metals leasing as fraudulent. That something is that the collateral of a metals loan, the actual metal itself, is sold (or consumed) and thereby destroyed. That is the big difference. It is the main point. What kind of secured lease permits the security to be purchased by an unrelated third party? Yet, that is precisely what happens in every single gold and silver lease.

Look at it this way. If you owned a condominium, and decided to lease it out, in return for rent paid to you, you would hope and expect the tenant to maintain the property in decent shape. You wouldn’t expect him to trash it. One thing you certainly would not expect the tenant to do would be to sell your condo to someone else, and pocket the proceeds, even if the tenant promised to return your condo, or pay you back someday in the future. That would be preposterous. Outrageous! Illegal! Fraudulent! Yet that is precisely what happens in every gold and silver loan.

Because of this outrageous conveyance of property, metal loans are inherently fraudulent. And manipulative. It doesn’t matter who is participating in these loans. What matters is that the process itself and very nature of these metal loans is fraudulent, thereby tainting those who participate. If someone is involved in a metal loan, then they are automatically involved in widespread fraud and manipulation.

OK, so what exactly are these gold and silver loans, and who is involved? Remember, I’m trying to keep this simple and accurate. The big lenders are the Central Banks of various countries. The big borrowers are the gold miners (in silver, the list of borrowers is broader). The Bullion Banks serve as the middlemen. The Bullion Banks are household names – JP Morgan (Chase), Goldman Sachs, AIG, Bank of Nova Scotia and others. The scheme works like this. Central Banks, with their large holdings of gold and silver, “lend” metal to the Bullion Banks, who in turn, extract a promise to repay the Central Banks metal from mining companies out of future production. The mining companies get to sell or use the metal until the time of repayment. The key to the whole scheme is that the Central Banks offer their metal out on loan, for the lowest known interest rate in the Western World, typically one half to one percent per annum. Without that artificial low interest rate, gold and silver loans would not and could not exist. The first proof that these loans are rotten to the core is that the Central Banks, by accepting such a low return on their metal, are doing something unnatural, namely they are accepting less than what they could get. The Central Banks are in the driver’s seat. They could charge the bullion bankers any interest rate they choose, yet they accept a half and one percent per annum interest, where they could charge 10%. After all, what could the borrowers do?

The borrowers still have to return metal collateral that doesn’t exist. The Central Banks have the borrowers over a barrel, yet they only ask for 1%. More crazy than this, is hard to imagine. Here we have loans that can’t possibly be paid off collectively, and only 1% is accepted. Everyone knows that a secured mortgage on a home is at least 7%. Where do they get off charging 1% on a completely unsecured loan? In fact, the metal leases are worse than an unsecured loan because the currency with which they have to pay it back doesn’t exist.

Ask yourself this – how can an inert, basic material even throw off an interest rate, in the first place? Why any interest rate? This is the heart of the whole fraud. Metals can’t return an interest rate under any condition. Period. Let me repeat that – metals can’t possibly generate interest. Even though you may see offers for “interest ” on gold and silver, it isn’t real interest that is being earned, it is something else. Just like the word “lease” is incorrectly used to describe what is really a sale, “interest” is a misleading word. This is not “interest”, this is something entirely different. This is a fee paid by the Bullion Banks to the Central Banks for the physical transfer of their metal. It can’t be called a legitimate sale because only 1% of the proceeds is payable over the course of a whole year, and not the full value of the metal transferred. What it comes down to is this. The Central Banks are trusting the Bullion Banks to return something that can’t be returned and are accepting a 1% fee per year for this “privilege”. That everyone accepts this Ponzi arrangement as a legitimate “loan with interest” is preposterous.

I don’t equivocate when I say these gold and silver loans can’t be paid back. Let me prove it to you. Oh, of course, some individual gold and silver loans are paid back, or rearranged from time to time. But, they can’t be paid back collectively. In fact, 99% of these loans are short term (one month to one year), and are automatically rolled over.

They are always rolled over. They have to be because they can’t be paid back. Here’s why. Since the old loans are always rolled over, and because new loans are constantly being created, there is a cumulative effect to these loans. They just keep growing and growing. It is generally accepted that a minimum of two years worth of world mine production is what these gold and silver loans have grown to. What this means is that, in order to pay these loans off, two full years of world mine production would be required.

Metal was borrowed, metal must be repaid. Two full years’ worth. Think about that. Think about how it could be possible for the world to take two full years of world gold and silver production, and set it aside to pay off these stupid, stupid loans. You have to imagine, for two long years a world with no new jewelry, no photography, no electronics. You can’t imagine that. That is impossible. Yes, that is why it is impossible for these loans to be paid back. And if you have a whole class of loans that can be proven, by common sense, to be impossible to be paid back, wouldn’t you consider that to be fraud? Wouldn’t you consider anyone engaged in granting new loans, or rolling over old loans, to be engaged in a fraud, wittingly or unwittingly?

But that’s only one of many proofs that gold and silver leasing is fraudulent and manipulative. Think about this. Leasing something allows you to use something for a fee. How in the world does someone “use” a bar of gold or silver? As a doorstop? There are only two ways you can “use” a bar of metal. Sell it or melt it. Period. Please think about this. If all you can do with a bar of metal, is sell it or melt it, how could such an item be leased in the first place? Only things that can legitimately be used can be leased. Money, cars, homes, machinery, airplanes, computers, even people themselves (contract workers), can be leased, because there is a utility value to each. But how can you lease an inert, non-utilitarian basic material? You can’t, legitimately. All you can do with such an item is sell it, or consume it. The simple point here is this – everyone is calling these gold and silver transactions leases, but that’s hogwash. They are sales, pure and simple. And if a financial transaction is intentionally mislabeled, in order to conceal its true nature, how can that not be some kind of fraud?

You see, since the only “use” one can derive from a bar of gold or silver is a sale or melt, all gold and silver loans are really sales or consumption. The metal that the Central Banks “loan” actually leaves the Central Banks vaults, and is sold by the Bullion Bankers to convert the metal into something useful – cash. You didn’t think anyone would actually “borrow” metal just to hold it and keep it secure, did you? That would make no sense. And, because the Central banks are selling, not loaning, we hit upon another fraudulent feature to these transactions. That is, the Central Banks, by lending, are really selling massive amounts of gold and silver, and are not reporting those sales. Because the disappearance of real metal from the vaults of the Central Banks is not being reported, the Central Banks who participate in gold loans have much less in their vaults than they publicly claim. That’s fraudulent reporting. The Central Banks will claim that they don’t have to report the actual metal missing from their vaults, because they are technically classified as “loans”. They’re lying through their teeth. It is criminal, as far as I can tell. (Silver is not considered monetary, so the Central Banks don’t report any sales or “loan” sales.) So, when you see the official holdings of a Central Bank, if they are engaged in these metal loans, their books are cooked. They have less than they are reporting. It’s terrible.

But, the fraudulent reporting of phantom metal holdings, as bad as it is, is not the worst thing. The worst thing, by far, is the economic effect these loans have had on the price of gold and silver. It has decimated the price of each. Because these loans are really sales, real metal is dumped on the market when the loan is originated. And dump is too kind a word. There are a minimum of 150 million ounces of gold, and one billion ounces of silver, out on “loan” from the Central Banks. That means that over the past 10 years or so, 15 million ounces of gold, and 100 million ounces of silver have been sold each year, on average, as a result of these loans. Since the loans are never paid back, this is all extra supply. This is in addition to mine production, recycling and straight Central Bank sales. Think of it this way, since we have annual world mine production of roughly 75 million ounces of gold, and 500 million ounces of silver, gold and silver loans have dumped two full years of world mine production on the market. How could prices not go down, and stay down with that type of extra supply? Think of any commodity that you want. Imagine someone dumping two full years of production onto the market. In a free market, a change of 5% or 10% in supply or demand sends most commodities to price extremes. Now imagine 200%. It’s a wonder that gold and silver are not lower. This is the manipulation and fraud of all time.

There are no real defenders of metal leasing, the premise is too stupid. Let’s face it, if it wasn’t as fraudulent and manipulative as I claim, then folks would be able to poke holes in what I say. They don’t, because they can’t. But the purpose of this article is not to recite the evils of gold and silver leasing. The purpose is to explain to you just what has really been going on in the gold and silver markets for a positive and constructive goal.

Let’s face it, I have established a documented track record claiming fraud and manipulation in gold and silver. I don’t need to add to that documentation. My purpose here is to explain to you how you can profit from this outrageous situation. You know, when you’re given lemons, make lemonade. The upside to the ongoing manipulation of these fraudulent gold and silver loans is the once in a lifetime opportunity that today’s depressed prices offer. Were it not for these gold and silver loans dumping massive quantities of metal on the market, prices would be nowhere near where we are right now. This is an unintended consequence of the manipulation of gold and silver loans. Unintended, because the purpose of this whole loan experiment was, obviously, not to present you with the buy point of a lifetime. That’s just the way it has turned out.

What’s important for you to do, is to think this leasing business through, and if you decide I am right, to position yourself the best way possible to take advantage of the unraveling of this stupid idea. That is one thing I can almost guarantee you. This leasing will eventually be exposed for the fraud it is. The end will come suddenly, because all frauds end that way. What you have to do is to position yourself beforehand, and to make sure you are in the right vehicle. The choices are many and the pitfalls will be great. This 20-year experiment in lending something that can’t be lent is coming to an end. The end will be violent. There will be an upheaval in the gold and silver world that has never been witnessed before. No one, certainly not I, can pinpoint with accuracy all the effects of this upheaval. But, it’s going to be big, and it’s going to be bad. If you are positioned wrong, you can lose.

It’s no secret that my favorite play is real silver. I’m just trying to play it safe. I don’t think it is a time to try to be clever and take chances. If there were no such thing as silver, I would go with gold. But, there is such a thing as silver, so silver it is. I believe that will give you the biggest, surest bang for your buck. Gold comes next. All paper contracts are suspect. Leverage should be avoided unless you are a dyed in the wool gambler, and are feeling real lucky. This isn’t a mining company forum, but if you pick a miner who is short (has promised to pay back-borrowed metal), a price rise could be disastrous, as it was to Ashanti and Cambior in the gold spike of September 1999. If you’re undecided on what to choose, keep it simple. Buy real silver. Don’t let the bluff of even lower manipulated prices throw you off the track. Use it to your advantage. Not only do you have the lease scam working in your favor, you have the added bonus of buying an item in critical shortage. Just keep in mind that the trick is to buy it before the leasing fraud is extinguished. To pass Leasing 101, you must be prepared for the final exam. There will be no “make-ups” offered. Good luck.

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