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(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.
Theodore
Butler
www.investmentrarities.com
(No
one can safely predict the future and it’s possible that Israel Friedman’s Butler’s analysis will prove
incorrect. Silver can go up, but silver can go down. It is up to you to read,
analyze, and arrive at your own conclusions. Prudence requires we emphasize
that precious metals may or may not prove to be suitable for your
consideration.)
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