Does anyone here know how the silver lease rates work. Right now silver lease rates are negative. Does this mean that someone will pay you to buy silver now. If so, that looks like a double deal. Are they really paying people to lease silver? How do you lease a consumable. I'm confused. If it is for a company that want to manufacture a product, how do they return the leased silver? If it is for an investment purpose, are they really paying people to purchase silver when the price is going up?
I don't know anything about it, but I suspect it could be used as a tool to measure the general silver markets confidence in the current price.
If you read this you will have a basic understanding of leasing gold or silver - http://www.24hgold.com/english/news...+Butler&article=481545130F8350&redirect=False
I have to say Doug that the link is pretty blatantly anti-leasing and horrendously one sided as to what leases are. PM leases are basically you loaning the metal to a third party for a fee. In the end they return the metal. There can be consequences if they cannot return the metal, but it is structured as if they can. Silver leases are the same as short selling stocks, you borrow the stock from someone for a fee, sell it, and have to return it at the end of the transaction by buying it back. You are betting that prices are high now and will be lower before you have to return it. All financial instruments have doen this for generations, nothing new.
To the OP question, according to Kitco: http://www.kitco.com/market/LFrate.html Negative lease rates indicate lack of demand of people wanting to lease the metal. If I had to analyze the trends, I would say the market is pricing for silver to be flat or up for the next 3 months at least, but are pricing for prices to be flat to down over the next 6-12 months based upon the lease rates. I have no idea of what the reversion to the mean tendency is in this market, so take that with a grain of salt.
Except for one thing, they cannot return the metal because they do not have it any more. As was stated - the "lease" is merely renewed in most cases. Of course you are correct, it is like shorting stocks. But just like with shorting stocks, the person doing the shorting is selling something he does not own but is owned by somebody else. With silver or gold, the person who is leasing the silver sells it at current prices all the while hoping that silver goes down. If it does go down, he then goes out and buys more silver from somebdoy else at the now reduced price and then returns that new silver to the person he leased it from. But if it does not go down, he is then forced to renew the lease and agree to pay more interest on that new lease. Or loose even more money over and above the lease rate he agreed to by buying new silver at the current higher price. The point of posting the article I did was to explain how it worked - it did that. I was not agreeing or disagreeing with the author.
As pointed out, the bullion banks make the loans to mainly the mining companies, who could return the metal as such from their future production. The only mine I am familiar, was on the reverse end when gold was much lower 2 years ago. They had sold a % of future production to the bullion banks in the past to maintain operating costs, so that at the time, for every 100 oz gold produced, 37% was presold at $582 oz, and the 63% at the then current $800 +/-. I imagine today, that company ( bought by another) is leasing gold to sell, and probably does intend to pay back with the metal sometime in the future. I realize gold is headed upward, but every wave has a crest.
I understand Doug but I thought the tone of the article was not conducive to understanding the transaction, it was to ridicule it and to basically say it should be illegal. That was not the OP question, and I objected to these financial transactions labelled that way. OF course they can be abused, but they also serve an efficient market purpose at times as well.
Bron Suchecki's blog, goldchat.blogspot.com, has some level-headed informed material about precious metal leasing. If I understood right, he said that the lease rates you see are not actual offers from bullion banks, but are calculated numbers based on forward rates and interest rates. If you get those numbers from different sources or at different times, you get a calculated "lease rate" slightly different from what you'd pay in real life. So if real-life lease rates are very near zero then calculated lease rates might accidentally show up negative. But people aren't going to pay you to borrow their silver, which is what a real negative rate would mean.
Well, I suppose if you were a central bank and you were concerned about a metal's physical price increasing too much as you were adding to your balance sheet, you could offer negative lease rates to flood physical metal onto the market to reduce the price. The person leasing the metal could sell it knowing whatever happens to the price they will come out okay: price up, they sell and profit dollars, hedge, speculate, or extend; price down they buy back later and profit quantity, price even they collect their rent. The central bank lending the gold would benefit by scaring people away from holding the metal and encourage the holding of inflatable paper. Yes, the above would be market manipulation, something I'm sure governments, central banks, and traders would NEVER cooperate in.
