The preamble to this
recent column by Ted Butler (subscription but worth it) is a discussion of how these 'gold loans' are not really proper loans, because the collateral gets melted and sold off.
What sparks the discussion is the recent talk about the Gold Forwards rates being negative, meaning that it is difficult to obtain leased gold. Ted does not like this kind of discussion.
So the gold leasing really does not make sense. When you loan a tool to your neighbor, you expect to get your tool back.
Now I would beg to differ at this point, because unlike your favorite power tool monetary objects are often considered to be 'fungible' and you don't ask for the exact bars back in a lease arrangement necessarily. You merely ask for the same quality, form and amount. Unless it is a custodial arrangement, but as the German people have recently discovered, good luck with that. You may get whatever they can find, because they have not merely stored the gold for you, they have utilized it.
Therefore Ted's reasoning goes, because they do not make sense, gold leases do not exist in any appreciable size anymore. They were just a kind of fad perpetrated by JPM and some foolish miners.
At this point I would say they do not make sense, but not for the same reason he cites. They do not make sense because they both misprice the counterparty risk AND the terms and other details of the leasing are not disclosed to all the interested parties, eg. the public who actually own their nation's gold, and not the central banker. The lengths to which the public must go to discover the extent of the leasing of their gold has been well documented by GATA for example.
The reason I find Ted's argument weak is that his conclusion is completely and obviously based on the 'efficient markets hypothesis.' I f something does not make sense, it ought not to exist in an efficient market, and therefore it does not.
Economists used to joke that if you told an efficient markets guy that there was a ten dollar bill lying on the sidewalk, he would reply that 'there couldn't be, because if there was someone would pick it up.'
I have asked the fellows at GATA if we have any firm numbers on current gold loans out, primarily from central banks. I know this is an ongoing quest because central banks are notoriously reticent to providing any such details of their activities.
I found this column to be of concern because Ted is a very well respected analyst and I read his columns regularly and like him quite a bit. So I do not wish this to seem to be overly critical. And Ted has been quite vocal in asserting that JP Morgan et al. have been manipulating the silver market based on what he has seen at the Comex.
But I did want to take the time to point out that a) gold leasing is not like lending out a specific object and b) just because something does not make economic sense to you, does not mean it is not happening. This is the story of all control frauds and bubbles, and misappropriation of others people's money and goods. Many of the financial deals that cities, counties and nations engaged in that cost their people hundred of millions of dollars made no economic sense, but there they are.
Ted Butler's column of Nov 19 - Popular Misconceptions
"Gold loans are fraudulent through and through, because the real owners don’t get the proceeds when the sale is made and the collateral ends up with an unrelated third party who has no obligation to return the metal. But because they appeared to work for a while, otherwise intelligent people overlooked the obvious fraud and collected the benefits while they were available. Today, those tracking gold loans report the amounts of these loans outstanding are down 95% from levels at the peak around the year 2000. For me, I can’t figure out how even 5% of these loans could still be in existence.
That’s why I’m skeptical about all the talk of GOFO and gold lending as who in their right mind would ever loan or borrow metal under the circumstances I’ve described? There are few, if any, documented instances of specific loans and the parties involved or to the purpose of these loans. I suppose it might make sense to be a borrower if one intends to default on the loan, but that’s hardly legitimate. Likewise, I suppose a central bank might lease metal if there was an illegitimate intent to depress prices, but that couldn’t be discerned from GOFO rates.
Therefore, I think all the articles and commentary about GOFO are still goofy and unproductive. It seems akin to some deep debate by religious philosophers during medieval times about how many angels can dance on the head of a pin. I’m not trying to be insulting, because I believe there is a negative side to the current discussion about gold loans and lending rates that would be eliminated if the discussion ended once and for all. There is somewhat of a common denominator in the debate over gold lending in that most reporting on GOFO appear to be staunch believers in the ongoing gold and silver price manipulation. It is also well-known that those who insist that there is an ongoing manipulation in silver and gold (like me), are considered to be fringe conspiracy theorists. I think that is somewhat earned because so many who believe in manipulation tend to espouse other conspiracy theories (definitely not me). "
