VANCOUVER (Silver Gold Bull) -- 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 within 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
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, 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 we impair our ability to sell the asset. We are intentionally "encumbering" that asset by lending it to a third 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 or even deductible losses (for instance the gold reserves of central banks). It would make sense to lend out their gold for very minimal profits (i.e. slightly "positive" lease rates) but 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 two 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:
- Buyers are being forced to wait extended periods to take delivery.
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 that (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 that 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 bullio, 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.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.