who thinks gold will rise against direwarnings, page-61

I agree that the case for Gold and against the USD is very strong, yet the USD has rallied and Gold has gone down since it was basically confirmed that there will be more rate cuts. Could it be that someone is trying to artificially restore faith in the USD? Gold Lease rates are spiking.



Lease Rate Spikes Prove (Gold & Silver) Price-Rigging
Alex Wallenwein

Although the "leasing" of precious metals by central banks is in itself a highly suspect practice that reeks of manipulation, it is the existence and simply insane magnitude of occasional spikes in lease rates that, if properly pointed out, gives even someone who is not a precious metals buff the willies.

For reasons that have been discusses by various analysts over the past five to ten years, "leasing" of precious metals is a thinly disguised effort to flood the market with precious metals in order to "manage" their prices. Leasing is the most in-transparent of official financial transactions, with few if any reporting requirements, and a total blackout of information as to how lease rates are actually determined. The very fact that a central bank that holds gold or silver as a reserve asset on behalf of the citizens of its country is willing to "loan" that metal to banks at ridiculously low interest rates, rates that have no equal in any of part of any economy (other than maybe in Japan, and recently the US, where near-zero interest rates have been, or are fast becoming, a way of life) just smells like a rat.

High precious metals prices are always anathema to any government or central bank that relies on the public's confidence in its worthless paper currency, and for that very reason must always be 'controlled" if the fiat-based monetary system is to survive. It therefore only makes sense that a central bank should be willing to flood the market with precious metals at strategic times in order to achieve and maintain that control. So the onus of rodent body-odor always dwells on this practice by definition, and readers should not conclude from this article that any sort of legitimacy is conceded by seemingly treating lease rates as bona fide results of actual market forces..

For gold bugs and longtime precious metals insiders, this essay may present nothing new in substance. However, to the author's knowledge, nobody has looked at the commonly known problem of precious metals leasing quite from the angle of lease rate spikes yet. It is this angle of view that once and for all will force even those who are not precious metals buffs to recognize that when lease rates do appear to respond to market forces and end up spiking as high as they did in the cases of gold and silver rates here under examination, there is no rational explanation for the bullion banks' willingness to "borrow" metal at such incomprehensible rates - other than the fact that they simply have no other choice: bite the bullet - or die.

Nobody outside the precious metals world who has any kind of a life (other than financial "professionals" who have a vested interest in the fiat system) has the nerve to pore over volumes and volumes of analyses of the nature, function, and implications of derivative contracts. Nobody whose opinion really counts wants to bother wading through that intricate, twisted mess - and it is not the professionals whose opinions counts in the end: it is the normally belittled "man in the street" whose opinion, once it turns, will make all the difference in ending this game.)

Everyone can appreciate something that goes so immediately against the grain that it "visually jumps at your crotch" as some Germans would put it. Lease rate spikes are that "something."

Who leases gold and silver? Do ordinary people borrow gold bars just to look at them for a while and then return them to the central banks? No. It is the bullion banks, an exclusive circle of highly connected private banking institutions, who act as middlemen in the mining companies' efforts to hedge against falling prices by selling their production forward. In addition to their role as middlemen, these banks have also sucked on the giant udder of central bank largesse for more selfish reasons through the precious metals "carry-trade." They borrow metals to sell them short and invest the proceeds at higher rates than those ridiculously low metals lease rates (usually at or below one percent!).

It is easy to apprehend that large banking institutions are not in the business of intentionally wasting huge sums of money for no apparent reason. They are motivated by a desire to make hefty profits. That's how they got that big, of course.

The lucrative "carry-trade" is effectively enabled by the central banks' unusual "habit" of charging bullion banks only 0.5 to 1.0 percent interest for borrowing the metal in the first place. The bullion banks then go out and sell the metal at market, invest the proceeds in higher yielding treasury bonds, for example, at maybe five percent, then buy the metal back at the end of the lease terms at market price to return the metal to its owner, while pocketing the interest differential.

Naturally, this works only if two factors are present: if lease rates are sufficiently below Treasury bond yields to create a profit, and if the price of the metal at the time of repurchase is not significantly higher than it was when they sold the borrowed gold into the market.

Enter the phenomenon of lease rate spikes. In the case of gold, one can make a number of interesting observations from the following graph:


(All charts courtesy of Kitco.com)

(A) In 1999, lease rates spiked from one percent to almost seven percent. When the best expected profit from investing the short-selling proceeds lies at about five percent, how much sense does it make to keep borrowing gold all the way up the rate-spike ladder to seven percent? Yet, borrow they did, our friends the bullion bankers, all the way up to the top - or the rates never would have spiked that far.

(B) Both of the lease rate spikes in 1999 and 2001 coincide exactly with the two bottoms of this wonderful 'double-bottom' formation that gold has exhibited to the never-ending joy of gold investors. Strange coincidence, isn't it?

As to point (A), why would the demand for leased gold increase to such heights at a time when the price is so low - and has been dropping for such an extended period of time as show on this graph - so as to explain this sudden, most unusual spike in 'rent' for the borrowed gold? And even more importantly, what bullion banker in his right mind would even dream about borrowing gold that is so cheap in the market place at such horrendous and anomalous lease rates - rates that deny him any possibility of a "carry-trade" profit from the outset?

As to point (B), why did these spike coincide with such low gold prices as demonstrated by the two major market bottoms on this graph. Market price bottoms supposedly occur because the demand for a commodity is low relative to its supply. But lease rate spikes of this magnitude signify an extreme supply shortage, or the rates would never climb that high.

Now compare the gold lease rate spikes to the one in silver during early 1998:


(All charts courtesy of Kitco.com)

While the gold lease rates more than quintupled at the peak of the spike, the one-month silver lease rate increased by roughly thirty times the pre-spike rate average of about five percent in December of 1997, all the way up to seventy-five percent during February of 1998! Talk about imbalances in the silver market! And John Q. Public is expected to believe that the price of silver remains near five dollars (about a ration of 70 to 1 relative to gold vs. the historical norm of 16 to 1) because there is so much of it around? Right.

While during the height of the gold rate spike the banks were losing only from one to three percent on their carry-trade, during the 1998 silver spike they lost seventy percent (the amount of the lease rate paid above the return from investing the proceeds from the short sale)! Obviously, compared to silver, the gold spike of 1999 was only a minor hickup, but the conclusion is the same: something far, far stronger than greed (the profit incentive) motivated these financial 'experts' to shovel this kind of money into the furnace.

The old adage tells us that fear is stronger than greed. So what are the bullion banks afraid of? What scares them so much that they feel compelled to lose horrendous sums of money by borrowing gold - and especially silver - at such mind-numbing rates? Why did they not just sit this one out and waited until the rates came down again?

Well, trying to figure out what went on in our banker friends' minds necessarily takes us into the realm of speculation. But speculation of this kind isn't always just that. If the 'speculation' is backed up by evidence and is a logical extrapolation of the bankers' actual conduct, it becomes reasoning - the type of reasoning that can lead to a conviction in criminal court.

In evidence law, a 'statement against pecuniary interest' is deemed reliable enough to make it admissible in evidence despite the fact that it is hearsay. What we have here is not hearsay, it is a documented fact: somebody did in fact go out and borrow silver at seventy-five percent interest for one month. This is a statement of conduct - kind of like flag burning is considered 'free speech.' And this conduct is definitely against the pecuniary interest of the actor.

What in the world would prompt them to do such a thing?

We do know one thing: in the case of gold, on both occasions, the gold price went steadily upwards after the end of both lease rate spikes. The question arises: how fast and how high would the price have climbed in the absence of all of the gold that was dumped on the open markets as a result of the leasing/shorting activity that is documented by these incredible spikes? Was that possibly the reason for this frantic and extremely expensive leasing activity? Would the bullion banks have a vested interest in preventing a large-scale rise in gold prices?

Uhmm, yeah.

In the case of silver, we know that the lease rate spike of 1998 occurred after Warren Buffet's disclosure that he had acquired, or was in the process of acquiring, 130 million ounces of silver. There we have it: a huge documented increase in demand, and a concomitantly rising price of the metal, closely followed by massive short-selling (leasing) of the metal as evidenced by the rate spike.

Any half-ways sane financial advisor would have told his clients NOT to short silver during such a massive accumulation phase by an individual/corporation with such mammoth resources. The upside pressure in the price is just too strong during such times, making the likelihood of finding silver at reasonably equivalent prices at the maturity date of the lease a near impossibility.

But shorting silver they did, as is evidenced by that gargantuan lease rate spike. As stated, a lease rate can only get this high if the underlying commodity is in a severe shortage at the moment in question.

The only possible conclusion is that bullion banks HAD TO force the price of silver back into the bottle - or die an untimely death due to their exposure to previously accumulated, rolled-over lease contracts beyond their means to cover at higher prices. Any other reason would assign to them a degree of irrationality that is belied by the fact that these banks are still in business, many with the same leadership today as then.

The next question that must be asked is: can such a shorting game continue to exist without at least the tacit support from high-level official sources?

When one realizes that right under the nose of the CFTC regulators the four largest traders on the COMEX account for over 200 million ounces worth of silver futures contracts sold short, while there is an ongoing, officially recognized, annual production shortfall of 150 MILLION ounces, a production shortfall. that has existed over an entire decade, year after year, one begins to wonder. When one then discovers that the enormous danger this imbalance presents to the integrity of the silver market has been officially denied by the same regulators despite several written inquiries pointing out the facts (letters to the CFTC sent by silver expert Ted Butler and others), then the conclusion that government officials tacitly condone this activity becomes a 'fait accompli.'.

In the case of silver, the motive for such action is presented by the industrial manufacturers' dependence on the continued availability of cheap silver - a vital raw material in high-tech applications, without which the industry could not remain (as) profitable.

In the case of gold, we know that gold is the nemesis of paper assets - especially of the fiat kind. Gold is also the nemesis of politicians and central bankers who want to pretend that inflation is "under control." A rising gold price also makes people think twice about throwing more money at the stock market, and may divert some of these money flows to the precious metal, where it doesn't serve the ends and needs of the banking and government elites. A rising gold price also makes people aware that their government-decreed paper money is maybe not that safe after all, and makes them think about investing in hard assets.

All of those are very bad things for our banker friends because they have their fingers deep, deep, in the paper assets pie. They profit because they are allowed - by government decree - to liberally loan money into existence out of nowhere, forcing their customers to pay it back through hard work or shrewd business practice, with interest. When the gold price rises and keeps rising, some of their subjects may think again about how this game is played and demand a return to the old gold standard - or something equally unacceptable to the bankers.

Such are the motives for precious metals price rigging.

In criminal court, it is rarely necessary to have an eyewitness who saw the murderer shoot his victim point-blank in order to get a conviction. It is usually enough if the witness heard a gun shot, turned the corner, saw the victim lying on the floor in a puddle of blood, and saw the perpetrator running away while a subsequent investigation reveals the gun dropped near the victim has the perpetrators fingerprints on it. Circumstantial evidence of this kind is often even more reliable than direct eyewitness accounts of the deed itself, which can often be attacked on several grounds.

What we have in the case of precious metals price suppression is the 'finger print' of outrageous, profit-killing lease rates gladly paid by normally profit-crazed bankers. Our dead body is the "good as dead" gold price during the two market bottoms. Seeing the graph of the rate spikes is the equivalent of hearing the gun shot. On top of that, we have a whole laundry-list of "motives" for the bullion bankers to engage in this assassination.

Case closed?

Not quite. What we still need is for us, the public, to actually look at the entire mess without squinting our eyes shut really tight. Many of us are still in denial, because we have been told for a decade that gold was officially pronounced dead. We have been told that inflation only exists when prices actually rise in the goods and services sector - not when the 'powers that be' artificially pump money into the system that ends up in the stock markets, thus saving the goods and services sector from the usual price rises while propelling stock valuations into a lunar orbit. We have been made to feel that we were smart when we threw house and hearth at the stock market, even on margin, and we believed it because we actually 'saw' our net worth increase.

Now that the stocks are down and we lost our shirts, it is hard for many of us to admit that we screwed up. We blame Alan Greenspan, we blame Bill Clinton, or George Bush, or the media, or whatever, and we do not have the guts to confront the truth and admit that we allowed ourselves to be misled. But the day of our self-recognition will come, and on that day we, the public, as both the judge and the jury in this financial courtroom drama, will pronounce the sentence on those who misled us. And that sentence may well be 'death' by lethal injection - a lethal injection of real gold and silver money into a fraudulent, debt based, world financial system.

Copyright Alex Wallenwein, 2003

[email protected]

March 20, 2003
Financial Markets