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Gold and Silver Lease Rate Manipulation

This appears to be new on Kitco as of Jan 18, 2006. Perhaps the most interesting graph is at the bottom. For those of you who are unfamiliar with the concept, central banks lease out gold and silver at very low metal interest rates. For gold, this is down around .1% per year. The gold is loaned to a bullion bank who then lends it to consumers at these low rates and it is then quickly sold on the spot market. Some is fabricated into jewelry, marked up 4 to 12 times and sold, but it is all sold. The central bank gets back a lease contract and puts this in the vault as a gold credit and counts the gold as still there in the vault. Upwards of two thirds of central bank gold being dumped on the markets is this invisible form of selling. If asked, the Western central banks will say they have close to 30,000 tons of gold in their vaults, when the actual tonnage is closer to 15,000 tons.

Take a look at the first graph. Notice how the recent lease rates have become all compressed together. This indicates that the long term borrowers are withdrawing from the lease market (these tend to be jewelry fabricators and mines hedging their gold production lest the price fall), while short term borrowers are borrowing more and driving up the lease rates. They borrow more when the price of gold is on the rise because the last thing the monetary authorities want is rising gold prices.

So far, this sort of gold debt probably totals 10,000 tons. Overall, gold lease rates are probably about the same as last year, but higher in the near terms indicating repressive gold price leasing (leasing to suppress the spot price of gold).

Notice that as gold began to rise last November, the red line rose above the blue line. This means the lease rates became inverted as demand for manipulative gold drove short term rates above long term rates. This signals significant stress in the suppression of gold. Remember, lease rate inversions are signaling stress in the financial sector. Scroll down to the second graph.

This graph goes back two years and covers the period when gold first breached $400. Notice that lease rates responded by falling long term rates and rising short terms. The rate curves became compressed closer and closer together. The financial sector was fighting the rise of gold and doing it by leasing more short term gold. But the mines, and jewelers were leasing less because leasing is still shorting gold and you don't do that in a rising market. Overall, the average lease rates for the past two years have not changed too much, as more short term leasing was balanced by less long term leasing. Now scroll down to the third graph......

Pretty dramatic eh? Lease rates over the past ten years have, on balance, fallen to less than a tenth of the rates prevailing ten years ago from around 2% to less than .2% What does this mean??? The falling rates suggest there is less demand for leased gold in a rising gold market. That is a very rational thing to do considering a lease on gold is actually a short on gold. The other thing this could mean, however, is that the official sector (central banks) are arbitrarily lowering rates to inject more official gold surreptitiously into the gold market. The fact that the blue and the red lines have come together recently (the lease rate spread is approaching zero or going inverted) strongly suggests this possibility. To conclude, this final graph signals incredible stress in the financial sector in its efforts to control gold prices. The low overall rates imply that the official sector is hemorrhaging gold but that this situation cannot continue for too much longer. In short, this final graph signals the death of leasing just a surely as an EKG like this would signal the death of a critically ill patient.

Silver lease rates display a different pattern to gold's. If you look at the ten year chart above, you will see that overall, the rates are far more volatile than gold and average higher levels.

Both of these traits signify that the silver lease rate market is far less liquid than the lease rate market for gold. In other words, central banks are less of an element in determining rates, and the market reacts more cleanly to demand factors. Silver lease rates curves go into inversion more frequently than gold and in a more extreme fashion. During the Buffett Spike of 1997-98, one year lease rates reached 76%, while today they are .30%.

In a similar pattern to gold, silver lease rates are also declining as is the volatility, but in contrast to gold, silver rates have become elevated over the past 7 to 8 months suggesting significant leased suppression of spot silver prices. This shows clearly on the graph below. This does not surprise me as the silver market may be the most manipulated in the world and has been for 300 years, when the British commenced their campaign to demonetize it. To give you some idea of the extremes that the monetary authorities will risk to control the price of silver (suppress a rise in price) during the Buffett spike, the spot price of silver rose from $5 to $7.50 while the lease rates rose from about 1% to 76%. Since lease rates are annualized, that means people were borrowing silver and paying over 6% per month metal interest to meet delivery commitments to Buffett rather than buying on the spot market. In this way, demand was displaced from spot markets into the lease markets where it was far less visible. The price of silver rose 50% over the span of a few months, while lease rates rose 7000% behind closed doors.

In this way, the general public was kept unaware of any excitement in the silver market, and most of the profit ended up in the pockets of the bullion banks.

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