Possible fuses that can ignite silver prices: silver leasing

June 24th, 2009

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In our previous article, “Possible fuses that can ignite silver prices: price manipulation“, we discussed about one Black Swan that may possibly ignite the prices of silver in future. Today, we will discuss about another possible price bonfire- the leasing of silver.

This is one of the most commonly unheard of practice. It takes place when a silver producer has buyers but does not have silver on hand to sell. To solve this problem, the silver producer borrows the silver from some entity who has a huge silver hoard (e.g. central banks used to have) and sells it to the buyer. The silver producer then has an obligation to return the silver with ‘interest.’ This is similar to the gold leases that we discussed in Get paid to borrow gold and silver?.

The problem with gold and silver leasing is that the loans are never repaid- they are simply rolled over. By some estimates, if all the gold and silver leases are to be repaid, all mining production have to be fully devoted to task for 2 years. If that happens, that means  the world can forget about producing jewellery, iPhone, Blackberrys, laptop computers.

As Ted Butler pointed out in his article, that there are 150 million ounces of gold and 1 billion ounces of silver on loan. There are currently no supplies to use for repayment. Thus, these loaned silver is a phatom supply which surpresses prices.

What if (or rather, when) the leasing system collapses? This is another Black Swan.

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