Ponzi Revistited

December 17, 1998

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 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?"

One cubic foot of gold weighs more than half a ton (1,306 pounds).