A discussion of silver lease rates and what they mean to us personally.

fc

Allow me to start the thread by showing the silver lease rates
for 30 days, 60 days, 6 months, and 1 year.






Some questions to discuss:

1. What exactly is the silver lease rate?
2. What do negative lease rates mean?
3. When lease rate's interest rate goes up what is that a sign of?
4. When lease rate's interest rate goes down what is that a sign of?
5. How do you interpret these graphs and what does it mean to you?
6. What does an inversion of two lease rates mean at the same time period?
7. Are silver leases used for manipulation?
8. What happened around 1998 and 2002?
9. Anything else people can dream up.

I will stop here due to the fact I am reading several web pages on this
topic trying to get a handle on it. Maybe forum members can pick
a number above and give us their thoughts in plain english.

thanks.

fc

<1. What exactly is the silver lease rate?>

Various country's central banks have tons of silver. They are the big lenders.

Companies like JP Morgan (Chase), Bank of Nova Scotia, and others
are the middlemen. The Bullion Banks.

The borrowers are miners and a broad array of others. In gold it is
mostly the miners.

I am going to explain the silver lease rate in plain english... what a
normal person would expect it to be. Just be aware that at first blush
it seems like a lease we have all done with a apartment or a car... but
it may very not be in most cases. Hold that thought.

It first appears that a silver lease is the central banks lending actual
silver to the bullion banks for a tiny interest rate. The bullion banks
then lend the silver to various companies who give them a promise
to repay the silver plus interest.

A key idea is that the end borrower of the silver either melts it for
use or sells it. After all, why else would they borrow it?

So is the word lease really being abused? A better term would be it
was sold right?

If this is the case... that the metal was used or sold.. it stands to reason
that collectively all the borrowers could never hope to make repayment
in the metal. It would take a few years of production to do this!
Do the central banks report these leases as sold bullion? NOPE.

Many of these leases are endlessly rolled over. Sure, some are repaid but the majority are not.

I will stop here. I think this explains silver leasing a bit and raises
some interesting questions.

Thank you to Ted Butler for the good info which i read a few times
and tried to summarize.

roadrunner

Opportunistic low gold lease rates in the 1990's got the ball rolling i the gold carry trade. Gold miners put money into leases rather than investing in their own businesses. By leasing the gold at 1% and re-investing in something earning 5-6%, they made guaranteed money. And this also helped to support a stronger dollar by keeping gold supressed. It's no surprise today that the gold intrastructure was allowed to decay for a decade and there are precious few new mines of any substance coming on line.

If the bullion banks wanted their bullion back (and some day they just might) they can require those who took the leases to pay them back with gold at current prices. And this one way in which the banks can eventually own a number of the gold miners. It is already assumed by many that Barrick is owned lock stock and barrel in just such a manner. If currencies or economies ultimately fail, gold will take a primary rolekeeper as money. And at that point I would assume the central banks will be asking for their gold back. To those that cannot afford to buy it back, they will effectively default their mining companies over to the CB's. Since the CB's would want control of any or all gold out there, this works fine for them.

By leasing out gold all these years the CB's have helped to keep gold at bay. Later, by having it come back to them, they still end up with it....plus they will own the financial world in the process. Nice work if you can get it!

In a nutshell, when I think of gold and silver leases, it is very hard for me to think of anything but "manipulation" and "scam" as it seems that's one of the primary purposes of those often too low lease rates.

roadrunner

fc

lease rates continue to climb on a daily basis. i am still trying to figure
out exactly what this means for silver investors.

Overdate

If the rates get high enough, can I lease out my roll of silver quarters?

ajbauman

fc - I cannot say exactly what this means, but to me it indicates a tightness of supply. The banks are demanding a higher percentage rate return.

This could be from a variety of factors:
1. Increasing demand
2. Decreasing supply
3. Increasing the rate could be a simple function of needing to increase their incomes in the face of financial ruin
4. As Silver is experiencing a retail shortage and quite possible an explosive run-up (with the gold/silver ratio at historic lows) banks see a future "run on silver" and are increasing thier lease rates to account for it
5. A combination of the above

Thanks for the graphs! I look forward to more intelligent discussion on this topic.

ajbauman

One more thing...are those graphs available farther back, say the 70s during the last PM bull run?

Would be interesting to compare the lease rates over those periods to now as well.

jamakin

Very interesting thread.
I also took note of the jump in lease rates a few weeks back but don't know what to make of it.
Here is an link to an old artical that adresses the issues behind a previous spike


lease rate jump from warren buffet buys '98

similar artical on silvr lease rates

"Lease Rates

The lease rate is the cost of borrowing gold. In much the same way that individuals borrow dollars, pay an interest charge, and then return dollars to the lendor, gold bullion participants will borrow ozs of gold, pay a borrowing cost, and return the ozs of gold to the lendor. The debt is measured in terms of ozs as opposed to dollars. The value of the metal when it is being borrowed or returned is not a factor. The central banks are the main lendors of gold and the borrowers are the larger industry participants. The lending and borrowing of gold is pretty much reserved for bullion bankers, mining companies, and jewelry manufacturers. You can ask your bank manager to lend you 10 ozs of gold, but you would almost certainly draw a confused look on his face.

There are two factors that determine the going lease rate which is determined by market forces alone. One is the difference in demand between gold for immediate physical delivery ( spot ) and gold contracts for later delivery ( futures ) . The other being the current interest rates for borrowing $US dollars.

High lease rates will encourage stockpilers of the metal to sell into the spot market even when they wish to maintain their inventory levels. Being guaranteed to buy the same metals back for a lower cost at a future date offers them every possible financial advantage. For this reason exceptionally high lease rates cause the demand for immediate delivery to be satisfied, and therefore never last too long." from www.kitco.com

roadrunner

The excerpt below from the Sinclair website:

Well, this will put an end to any remaining gold carry trade. For those that do lease gold, they have to go out and buy gold in the current market to pay it back. For those that leased gold back in the $300's and $400's, they have to pay those ounces back by buying at current levels. Not having gold as readily available to play Hanky's PPT Panky on the NYMEX will make it more difficult to depress gold, then again, there's always GLD, the "banker's friend."

Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level.

The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.

Gold lease rates for two, three and six months and for a year also jumped to levels not seen in the last seven years.

Traders said the jump reflects the fact that central banks – mostly European – have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not repay their bullion loans if they are engulfed by the financial crisis.

"A number of central banks have been cutting back on their gold lending," said Tom Kendall, a precious metals strategist at Mitsubishi in London.

roadrunner

ajbauman

Awesome articles jamakin! I guess I was pretty close in my guess... but it also speaks of how the market manipulations have been carried out in the past, interesting.