Gold and silver leasing some ideas from Mr. Butler
For the past 15 years, gold and silver have been leased from central
banks and then sold on the open market by the recipients of the metal -
bullion banks, mining companies, users and speculators. It is a pure short
sale as the metal is sold by the recipient of the lease and must be paid
back someday to the lending central bank. It is the interest rate on the
lease that is all that matters to the lending central bank, as a result,
metal is dumped on the market irrespective of price. The resultant physical
short sale position has been growing for 15 years (as there has never been a
year of net repayments), and can't possibly be paid back according to the
most basic laws governing the world of physical properties. It is this
uneconomic selling of metal that is flooding the market and depressing
prices, in spite of the existence of a well known physical deficit in both
gold and silver. The laws of supply and demand have been upended in the
gold and silver markets, yet the CFTC pretends to notice not. One would
think that this description of central bank leasing of gold and silver would
be enough to get the CFTC rolling. But let me get a lot more specific and
lay out for them just what laws and principles are being broken and offer up
the name of a specific violator - the Barrick Gold Corporation.
I contend that Barrick Gold has violated the most basic principles of
commodity law and in turn, has contributed mightily to the manipulation in
gold and silver. The principle violation revolves around an obvious and
intentional evasion of the rules and laws of the CFTC. Specifically, by
utilizing the leasing/forward sale mechanism, Barrick has been able to short
sell many times what the legal limit would be on a US futures exchange,
according to the clear intent of commodity law.
Barrick's annual gold production is roughly 3.5 million ounces, or
approximately 5% of total annual world production. As of March 31, 1999, the
company held a reported physical short sale position of 12.5 million ounces,
or approximately 18% of world annual production. This is gold borrowed from
central banks (additionally, Barrick is short millions of paper ounces of
gold and silver equivalents, as well as a sizable physical short silver
position). The 3.5 million-ounce annual gold production is equal to 35,000
contracts on the COMEX; the world's leading precious metals futures
exchange, or what would be the equivalent of 17% of total open interest. The
12.5 million-ounce physical gold short position of Barrick is the equivalent
of 125,000 contracts on the COMEX, or an astounding 60% of total open
interest. That's right, Barrick holds a short position that is the
equivalent of 60% of the total position of the world's largest gold futures
market - and it's been over 70%! (And to think they called the manipulative
Sumitomo copper trader "Mr. 5%" for his reported share of the copper market
- does that mean Peter Munk, Barrick CEO, should go by "Mr. 60%"?)
According to commodity law and the clear intent of that law, Barrick
Gold would never have been able to amass a 125,000 contract short gold
futures position on the COMEX. Even the brain-dead CFTC would have caught
that. After all, the CFTC is guided by position limit laws dating back 60
years (source - www.cftc.gov) that forbid a commercial entity from hedging
more than one year's production. The reasoning behind that law is that it is
impossible to forecast, with accuracy, beyond one year, and more
importantly, if a commercial entity hedged more than one year's production,
it would have an undue influence on the market. In other words, if a
producer sold (hedged) more than one year's production, the framers of
commodity law knew it would artificially depress prices. Clearly, this is
what Barrick has done. But it is much, much worse than that might appear.
What Barrick has done, aided and abetted by the CFTC, is literally
destroy the very nature of hedging - the very soul and justification for the
entire futures concept. Not only has Barrick violated the original law's
clear intent of not selling more than one year's production, it has
additionally violated the intent of law by positioning it's short sales
outside the apparent reach of commodity regulation. By choosing the
leasing/forward sale mechanism, rather than a futures contract, Barrick has
escaped, temporarily, CFTC oversight.
It would be bad enough if Barrick had somehow been able to sell 12.5
million ounces of paper gold on a licensed futures exchange, but the fact
that they have sold short 12.5 million ounces of real, physical gold
(borrowed from central banks), makes it much worse. While the framers of
commodity law knew that excessive paper sales would depress prices of any
commodity (hence the laws concerning position limits), they never imagined
that someday someone would be stupid or manipulative enough to sell short
excessive physical commodities. If excessive paper short sales can depress a
market, how could a reasonable person deny that excessive physical short
sales wouldn't have an even more pronounced effect? In a nutshell, the
physical selling of leased metal has been screwing up the free market.
That's the problem with this whole leasing/forward sale concept - it is so
inherently bankrupt, that it just flies under everyone's radar. For the
umpteenth time, you can't lease an item, consume or sell it, and pretend it
can be returned in a deficit - that's fraud.
Barrick has additionally destroyed the concept of hedging by adopting
a policy of never, ever covering a physical short sale. Look at their
annual statement or web page (www.barrick.com), and you will see this
clearly. Their short position has never been reduced, and they state clearly
that they intend to increase it. This is not hedging; this is mindless
manipulative short selling. Real hedges are established and liquidated
according to the price of the underlying commodity. Legitimate hedging looks
to lock in a favorable price and then close out the hedge when the price is
close to cost of production. Barrick isn't hedging; it is short selling
massive quantities of physical gold for a much different reason - to be able
to speculate with the proceeds of their giant gold short position, some $4
billion. (And while this speculative activity accounts for the bulk of their
total earnings, you have to wonder how they are doing on that speculation
lately, now that interest rates have turned up or how they will do in the
future).
The most remarkable aspect to this whole line of thought is the lack
of response to my allegations by both Barrick and the CFTC. Let's face it,
I'm accusing Barrick of some pretty serious and quite specific violations,
and the CFTC of outrageous dereliction of duty. If I were way off, they'd be
all over me. Yet they both do their best to ignore it, hoping it will just
go away. While Barrick can be excused for its silence (it has already said
too much in its public reports), that the CFTC has yet to issue one
statement or one word about the leasing of precious metals and its effect on
the market is mind-boggling. The practice that has influenced (negatively)
gold and silver the most during the past 15 years has drawn no comment from
the chief commodity watchdog. That should explain to you how the recent
copper manipulation could have existed for so many years under the close
supervision of the CFTC. This dog won't hunt.
Because this agency can't or won't do its job, I think it is time to
give them a little help. I think it is time to force the CFTC to address
this issue. It is too important to be ignored. Please understand me, I'm not
saying that the CFTC has to agree with any or all of my contentions. They
just should go on record as saying something, silence is no longer an
option. Too many regular people see that something is wrong in gold and
silver. Hell, they can even say it's not in their jurisdiction (but that
would be hard after piling on afterwards in the copper manipulation) - just
tell us whose job it is. There appear to be as many as 500 million ounces of
gold and over a billion ounces of silver sold short in the leasing scheme,
by a wide variety of financial institutions, mining companies, users and
hedge funds. Leasing is the prime determinant for the price of gold and
silver. It is time for the CFTC to state what impact leasing has on the
market. If there's something wrong, fix it. It's OK for them to dismiss my
allegations about leasing in general or Barrick Gold in particular, but not
without saying why.
To that end, if you agree that my contentions at least merit a
response, I respectfully request that you let the CFTC know, either
directly, or through an appropriate political representative, that you would
like the issues above addressed (see the above URL for mailing and e-mail
addresses). Please feel free to include this article. We are witnessing the
destruction of a vital free market system, but there is something we can do
about it. Although it appears they must be dragged, kicking and screaming,
to the scene of a massive manipulation and fraud, we can force the CFTC to
do its job. Ted Butler - June 27,1999.î |
