Don,
Would appreciate your critique on the following article by Ted Butler:-
PONZI REVISTITED
gold-eagle.com
Over the past year or so, I have observed a marked increase
in the references made about leasing in regards to the
precious metals markets. Analysts and commentators attempt
to describe its impact on the market, estimations are made on
the total amounts of gold and silver loans outstanding, and
metal lease rates are readily quoted. We have even witnessed
Federal Reserve Chairman Greenspan refer to gold leases in
recent public testimony and the Comptroller of the Currency
issue reports of how involved US banks were (over $50
billion for less than one year maturity). Rumors swirled
around Long Term Capital Management's 10-12
million-ounce gold loan. No one denies that precious metal
loans exist. What no one appears able to answer, is why they
exist. In the clearest language I am capable of, I will attempt
to prove that metal loans are fraudulent and manipulative, and
that upon the demise of this fraudulent leasing, gold and silver
prices will respond immediately and forcefully higher. In
addition to cordially inviting critique of my thesis, I will
suggest some positive action that you might permit yourself,
should you find yourself in general agreement with my
contentions.
I am simply amazed that people don't see through the leasing
scam. There are scores of analysts and market buffs, that are
as smart as can be - people who I genuinely respect and
learn from - who can analyze a market as well as anyone,
who just draw a blank on the issue of metal leasing. I would
like to examine why smart people don't see the fraud in metal
leasing yet, and why, when they do, they will force it to end.
I think the initial obstacle to realizing metal loans are
fraudulent is in the word itself - lease (or loan or rent). This is
a basic, common knowledge, elemental word. I would
venture that over the age of reason, everyone in the world
knows its meaning, and will employ it their lifetime. We all
have, or will have, leased a home, car, or something physical
- or borrowed or loaned money, at some point in our lives.
We all have our own personal experiences that reinforce the
meaning of this most basic part of modern life. We know
what someone means when he refers to loan or lease or rent.
He means in return for its use (home, car or money), a user
payment is made, and at the conclusion of the loan or lease,
the item is returned or the loan is paid off. Simple, no
exceptions. Except of course, for precious metal loans. With
these, loan means something else. Loan means sale. Huh?
This is what trips everyone at the outset. You hear the word
lease - you automatically know, based upon a lifetime of
experience, what the transaction is about. You just have to fill
in the blanks - what property or how much, what rent or
interest rate, for how long? But when it comes to precious
metals, take everything you know about the word lease, and
throw it out the window. For precious metals, lease does not
mean lease - it means something else entirely. It means
another elemental word - sale. Or more precisely - fraudulent
sale. I promise you, if you try to fight the urge to assume that
lease means lease when it comes to precious metals, it's really
simple to see through these fraudulent transactions.
Why does the word lease mean sale only in the precious
metals world? Because you can't lease a precious metal, the
way you or anyone in the world defines lease. It would be
too stupid - it would have no purpose. Let me explain. Your
concept of leasing a physical object, a home, a car, or a
piece of equipment, would be to use what's leased, pay for its
use, and return it at the end of the lease. Now take your
concept and apply it to a bar of gold or silver. Explain to
yourself how you could possibly "use" a metal ingot. What
good would it do you to be able to lease a bar of silver?
Would you use it as a doorstop, or to impress women, or for
extra weight in the trunk of your car for traction? Forgive me
for being flippant, but let me assure you that you will find no
use for gold or silver bars in conformity with your
understanding of the word lease.
Now if you were a crook or an industrial consumer of silver,
or a gold miner, or a hedge fund I bet you could find a "use"
for borrowing bars of silver and gold. You could consume
(destroy) it in manufacture, or you could sell it, and convert it
to currency. But does that use constitute a lease or a sale?
Well, if the metal belonged to someone else and you
borrowed it, and sold it to another party, and you pocketed
the proceeds, I think you might think of it as a sale - a
fraudulent sale. If that sounds wacky to you - let me assure
you it is what happens in every single metal loan transaction.
That's another aspect to these loans that keeps smart people
from understanding their true nature - they are so wacky and
off the wall, that it's hard for smart people to believe
something so stupid could exist for so long (15 years).
Another obstacle that prevents sharp analysts from grasping
the true nature of precious metal loans is the lack of public
and precise source information. These are not transactions
done in the sunshine. Central Banks, whose holdings of gold
and silver provide the basis for these devices, are notoriously
circumspect about their dealings. They tell you only what they
want you to know. Still, if you look hard enough, the
evidence is there. For example, on November 13, the
Philippine Central Bank issued a press release that stated that
net interest income from silver and gold loans jumped to
$100 million in the first half of 1997, from $30 million in the
year ago period. A crack analyst could deduce that it came
from primarily silver loans, as silver prices and lease rates
were sharply higher in the period, and that further, the
Philippine Central Bank had between 150 to 200 million
ounces of silver out on loan (never to come back, I might
add).
One last obstacle in the way of recognition of metal loans as
fraudulent devices is the long list of establishment
organizations that participate in them. It's hard to conceive
that metal leasing is inherently dishonest when so many blue
chip investment firms, central banks and mining companies
have embraced it. To this, I can only say that if broad
participation is the determinant for legitimacy, all manner of
fraudulent schemes would get a stamp of approval.
In fact, metal leasing resembles closely any typical Ponzi
scheme - you know, the pyramid cons where early investors
get paid back with proceeds from later contributors, which
perpetuates itself until not enough new investors can be
found, and the whole thing collapses and the fraud is
exposed. Of course, while the con is on, participants are true
believers and are thankful for their returns - naysayers and
critics are treated as jealous, or worse. Kind of like right now
in metal leasing.
At the heart of any Ponzi scheme is a defective economic
premise. Invariably, the fault concerns an illogical termination
assumption - as in, what happens when everyone who could
possibly contribute, has contributed? Without exception,
collapse is immediate when that point is reached, or when it
becomes public that something is wrong, and existing holders
attempt to withdraw. This is what's wrong with metal loans -
at its very heart, it is based upon a defective economic
premise. That premise is that gold or silver bars offer any
economic lending benefit other than consumption or sale. And
by consumption or sale, you have immediately destroyed the
underlying collateral, rendering any and all metal loans into
sham transactions. This is major fraud. Try selling that car
you're leasing, or that apartment you're renting and pocket
the proceeds. Do you think if you promised the leaseholder
or landlord to pay them back some day that it would keep
you out of jail? Look, it's either a lease or a sale - all the big
name investment firms or mining companies in the world can't
change the meaning of basic building block words. They can
fool themselves if they want to into believing that sales are
leases, but there is no reason the rest of the world has to go
along with their stupidity or fraud. There is no reason for the
rest of the world to have to continue to suffer the
consequences of their own personal Ponzi scheme.
When the end comes in this metal-Ponzi scam, the collapse
will look different than the implosion of the typical variety.
That's because the 15 year stream of secret physical metal
contributions from central banks under the guise of loans has
structurally altered the supply/demand balance in gold and
silver. To date, over 300 million ounces of gold and 1 billion
ounces of silver have been dumped uneconomically on the
market. Like a drug addict, the market has absorbed them
and grown dependent upon more dumping to satisfy growing
demand. No, when the collapse of the metal-Ponzi scheme
arrives the only thing imploding will be the books of the
dealers and the miners and the hedge funds involved in this
fraud. To the rest of the world, it will look like an explosion -
the biggest explosion ever seen in precious metal prices.
The defective economic premise in the metal-Ponzi scheme is
the selling of ever-increasing quantities of gold and silver, in
which the real owners (the central banks) don't receive the
proceeds, and those that do (mining companies and hedge
funds) issue the hollow promise of returning physical metal in
the future. It doesn't matter how happy the central banks are
to receive the "interest" in this scheme, nor how sincere the
mining companies are in their promise of repayment, the
whole scheme is absurd. The real physical market is in steep
deficit - it just keeps chewing up the collateral and moving
steeper into deficit. It's just a question of when the scam
ends.
To those who would claim that I am just arguing semantics
with the distinction between loan or sale, please keep this in
mind - by claiming they are merely loaning the metal that
belongs to the people of their countries, the central banks
avoid all public disclosure of the divestiture of national assets.
This is an integral aspect of the metal-Ponzi scheme. By
saying you are loaning, not selling, nothing has to be
disclosed. Additionally, the mining companies involved in this
scheme have wide latitude in reporting their finances, because
no one is really sure what they are up to. The bottom line,
however, is clear. Metal loans can't be paid back because we
have a shortage and there is no material available to pay them
back with. That's what makes it fraud.
There are only two ways for this; the largest Ponzi scheme
ever witnessed, to end. One, the supply of new metal thrown
into the con is exhausted - or two, the existing suckers get
drift of their predicament, and attempt to withdraw their prior
deposits of metal. There is not much you could do about the
former, but you just might be able to impact the latter.
My suggestion, if you find yourself in general agreement with
the thrust of my argument, and feel you would be better off
with the certain higher prices that would result if this leasing
scam were terminated, would be to question those companies
and regulators who you feel might be involved in metal loans
about my contention. If you want to use this URL, please do.
But don't be concerned about raising the issue, the responses
you receive will be revealing. It's been over a year and a half
since I first raised the issue with the Fed and the Treasury,
and I have yet to hear an intelligent response to the question -
"why would anyone want to borrow a bar of silver or gold?"
Ted Butler
16 December 1998 |
