Hi Ray! I have become interested in the effects of silver loans on the market. Ted Butler feels that there are at least 1B oz of outstanding loans......this would be a huge number, as there is not enough silver to cover it.
However, I have one problem with this number......have big institutions held 1B ounces in inventory recently? If not, how could 1B oz be loaned out?
What is your take on:
*Central banks' silver inventory levels
*Outstanding silver loans
The story that Buffet loaned out his silver last year but is now calling in the loans is also interesting.
Thanks!
THC
The Real Lenders of Last Resort (by Ted Butler)
A number of market observers have noted that the current excitement in the
silver market is occurring exactly one year after Warren Buffett's
announcement of his big silver purchase. Last year at this time the price of
silver surged and the lease rate skyrocketed to shocking levels. If you
think the timing of the current volatility in the silver market is just
coincidental with last year's move; perhaps you will permit me to argue
otherwise. I contend that the sole cause of the current volatility in silver
is precisely what occurred exactly one year ago.
Just a brief recap of what transpired last year at this time: After months
of rumors of mysterious large purchases of silver by a group intending to
manipulate the price upward, and against a backdrop of threatened lawsuits
and government and exchange investigations, it was announced that Warren
Buffett's company, Berkshire Hathaway, had purchased approximately 130
million ounces of silver. Mr. Buffett subsequently explained that he had
followed the silver market for thirty years and was attracted to it on the
supply/demand fundamentals alone. The lawsuits and investigations
disappeared, and the price of silver, along with lease rates peaked within a
week of the announcement, and remained relatively comatose for a year, until
a few days ago. That is not to understate the stresses in the silver market
a year ago. After all, the real price of silver, the lease rate, surged
almost a hundred fold for the one-month variety (from .84% to 80%) in
roughly six months, due to Mr. Buffett's purchases. Then things quieted
down, with one-month lease rates quoted around one per cent as recently as a
few weeks ago.
But things got decidedly unquiet in silver in the past few days, with lease
rates surging once again. Here's why it's not a coincidence that the rates
are surging exactly one year after the last great lease rate spike - the
leases that were entered into a year ago, just came due. A year ago, the
one-year silver lease rate exceeded 20% and that was on $7 silver. That's a
far cry from the 3% on $5 silver that was available until a few weeks ago.
So when the one-year leases came due, starting a few days ago, the lenders
of silver said, "no thanks, I'll take my silver back". If you've read any of
my previous articles, you know that presents a problem - a billion ounce
problem. That problem is that the leasing scam is predicated on more and
more new metal being loaned to satisfy the deficit. There is no provision in
the leasing scam for metal being returned. It is not possible for there ever
to be net repayments of metal. With an ongoing deficit, it is just not
possible. The only way to temporarily avert the certain coming default in
metal loans is to placate the lenders by offering higher rates to dissuade
them from calling in their metal. And that, in a nutshell, is what is
happening right now. And don't think for a second, that the published lease
rates necessarily reflect the private rates being offered by desperate
borrowers who have no choice but to pay whatever the lenders demand.
But the lenders, unlike the borrowers, do have a choice. They can extract
whatever the traffic will bear, and roll over their leases, or they can look
into the future and see what will happen at the next roll over, or the one
after that. At some point, metal lenders will measure the return on
principal against the return of principal. And it's just possible that that
contemplation is currently in play. For if one or two big lenders of silver,
say a Buffett or a Philippine Central Bank, decides that the lease scam
jeopardizes the return of their metal, and refuse to roll over at any rate
offered, then the lease con is over and the price of silver will be the
price of silver, not some make-believe Wall Street concocted interest rate.
What are the prospects of a big silver lender or two ignoring the siren call
of the coming usurious interest rates and demanding that their metal be
returned? I don't know. But if I were a metal lender (admittedly absurd), it
would bother me a bit, that after such a long period of low rates, as soon
as I signaled my intention to not renew my leases, the borrowers strongly
resisted returning my metal by offering rates that escalated daily. It would
make me wonder if they could return it at all, if they had to. It would also
bother me, that unlike a year ago, when Mr. Buffett's purchase obviously
impacted the market temporarily, that this year there was no hint of any
large purchase currently. In other words, just my leases coming due, and not
being rolled over, was enough to send the market into a tizzy. If I were a
lender, it would upset me to realize that the market needed my collateral
that much.
Regardless of how this current drama in silver is played out, there is
another point becoming obvious. New silver supplies for lending are drying
up. Otherwise, there wouldn't be such a strain being caused by existing loan
rollovers. I thought that was true a year ago and I've come to realize why
my timing was off. This is speculation, so treat it accordingly. When Warren
Buffett purchased his silver, I think even he was surprised with the fanfare
and resultant strain his purchase put on the market. Being the respected
establishment figure that he is (in addition to being a cracker-jack
investor), he was loath to cause a market default by demanding all the
deliveries he was entitled to. He knew the shorts couldn't deliver. So he
let the shorts off the hook by leasing back a good chunk of his silver. Now
the lease is up. Is he going to let them off the hook again? Maybe he will,
but remember, he has a fiduciary responsibility to his shareholders, and you
can be sure he's concerned about the ultimate return of the silver.
But whether the current battle of the expiring silver leases is resolved by
rollover or the return of collateral or default, the lesson of the current
silver turmoil should be clear to everyone. That lesson is that metal loans
are fraudulent and manipulative. They are inherently flawed. How many crises
must occur before that is obvious? How much longer before the market rejects
the premise of the destruction of collateral as a normal requisite in these
stupid transactions? How can our army of market regulators not see this
fraud? What do they do all day?
The silver lenders of last resort might want to think this through before
they decide to roll over their loans or call their silver in - is this the
way metal lending was supposed to be? Don't you find it odd that the
borrowers seem so aggressive? Do their explanations of how they plan to
repay your metal reassure you? Just what is your protection in the event of
systemic default?
Ted Butler
February 4, 1999
Also by Ted Butler
Silver Loan Situation:
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