The Fraud of Negative Gold/Silver Lease Rates

Experienced precious metals investors are familiar with the topic of “negative lease rates” for gold and silver bullion. However, even novice investors can infer what is being discussed: paying someone to “borrow” gold/silver bullion.

In general, any time we contemplate a situation where lenders are paying borrowers to borrow, the word “dump” immediately comes to mind. This is because we begin the scenario with a lender choosing to enter into a transaction with the deliberate outcome of losing money. Because the world of commerce is entirely devoted to earning profits rather than creating losses, this automatically also implies market-manipulation – and thus fraud.

It is with this general context that we can now look at the particular subject of the gold and silver markets, where lease-rates are now usually negative (and are negative again currently). With negative lease rates creating a prima facie presumption of manipulation and fraud, the issue then becomes whether the particular fundamentals of the gold and silver markets either support or refute that presumption of fraud.

The easiest way to approach this issue is by asking ourselves a question: are there conditions where it might make some crude “business sense” to enter into a transaction with the deliberate intent of losing money? This is ultimately a fairly simple question to answer since when we examine any market, we quickly discover that it is very difficult to construct even hypothetical circumstances where it would make sense to lease that asset at negative prices (other than illegal/nefarious purposes).

The immediate proposition we must confront is that the moment we separate ownership of an asset from possession of that asset that we impair our ability to sell the asset; we are intentionally “encumbering” that asset by lending it to a 3^rd party. This is problematic with respect to any-and-all price behavior in a market.

If prices are rising, we don’t want to encumber our asset; since it impairs our ability to take profits (through a sale) – and incurs further losses at the same time through losing money on the lease transaction. The situation is even more adverse with respect to a falling market, since prudent asset-holders would want to retain maximum liquidity with that asset should the need to sell the asset (to cut losses) arise.

Even in a flat market it makes no sense to engage in losing transactions via negative lease rates. By definition, a flat market implies “dead money”: an asset generating no profits (nor even deductible losses). Should a party be forced to hold a “dead” asset like this (for instance the gold reserves of central banks), while it would make sense to lend-out their gold for very minimal profits (i.e. slightly “positive” lease rates); it would never make sense for these asset-holders to lend-out their bullion at a loss.

With there never being price conditions under which it makes sense to lease bullion at negative rates, this leaves us only one more variable to consider: inventories. If the (changing) value of an asset is never a valid basis for choosing to lose money by lending gold/silver at negative rates, then maybe the quantity of an asset being held would be a valid determinant?