Even the Best Can Fall Victim To the ‘Efficient Markets Hypothesis’

The preamble to this recent column by Ted Butler (subscription but worth it for his fine work in tracking the silver market) is a discussion of how ‘gold loans’ are not really proper loans, because the collateral gets reformatted and sold off.
What sparks the discussion is the recent talk and articles in Bloomberg about the Gold Forwards rates being negative, implying that it is difficult to obtain leased gold. Ted finds this kind of discussion frustrating apparently. They disclose rates, but not the amount of ongoing transactions.
Ted explains that when you loan a tool to your neighbor, you expect to get your tool back. In the case of gold leasing, as Bloomberg points out, the gold gets reformatted and sold off to Asia. So the gold leasing really does not make sense to Ted.
Now I would beg to differ at this point, because unlike your favorite power tool monetary objects are often considered to be ‘fungible’ and in a lease you may not expectto get the exact bars back necessarily. You merely ask for the same quality, form and amount as I understand it. If this is not the case, then Bloomberg has inadvertently disclosed a massive fraud.
You don’t expect to get your bars back unless it is a custodial arrangement. But as the German people have recently discovered, good luck with that. You may get whatever the custodians at the Fed can find, because they have not merely stored the gold for you, but they have apparently utilized it.
Therefore, Ted’s reasoning goes, because they do not make sense, gold leases do not exist in any appreciable size anymore. They were just a kind of fad perpetrated by JPM and some foolish miners some years ago. That forward selling in the form of hedges blew up badly and miners like Barrick were forced to take sizable losses in a rising market.
At this point I would say the leases do not make sense, but not for the same reason Ted cites. They do not make sense to me because they both misprice the counterparty risk AND the terms and other details of the leasing are not disclosed to all the interested parties. The lenders who are central banks do not inform. the public who actually own their nation’s gold. Such leasing ought to be disclosed transparently and in real time.

This post was published at Jesses Crossroads Cafe on 19 NOVEMBER 2014.