The movie was childish, zany, gross and moronically hilarious. OK, I admit it – I loved it. There were just too many funny skits to recall all, but the dead bird repaired with scotch tape, the snowball fight and the scene where the bad guy finally gets the return of the suitcase with the million dollars stand out. As the suitcase is opened, only to reveal scores of pieces of scrap paper upon which are written amounts and notations as IOUs for the money that was stupidly squandered by the two idiot protagonists, one, Jim Carey, seriously explains that theyre good for the money and the chits should be handled with care – especially the one for the car that they spent $250,000 on. The humor was in the absurdity between the sincerity of the promise of repayment with the likelihood of its fulfillment. Even if you havent seen the movie, if you try to picture the scene of the pile of worthless paper being passed off as dollar equivalents, you will have an insight few possess in analyzing the most bizarre financial instrument ever devised in the precious metal world – the metal lease/forward loan. While the comparison between a slapstick comedy and financial instruments with outstanding values measured in the tens of billions of dollars might seem far fetched, I ask you to reserve judgment and decide for yourself.If you have trouble picturing important financiers, central bankers, executives of major mining companies along with most of their investors, analysts and commentators of the precious metals world, along with market regulators being compared to the nitwits in the movie, I can understand.Perhaps they are all not stupid, but it is my contention that the very principle of the precious metal loan/forward sale is dumber than dumb. For 15 years, we have witnessed two of the worlds most important markets, gold and silver, distorted beyond reason by an idiotic premise enthusiastically embraced by people who should know better.What are metal loans/forward sales? While there can be variations, simply put, they are devices intended to allow the owners of gold and silver mainly central banks and other government entities the ability to earn interest on their metal and the borrowers mainly mining companies, but increasingly, large speculators the access to cheaper money and/or better deferred prices than available from conventional sources. On the surface, they look and work just fine. The central banks are receiving interest 1-2% annually on assets that never in history before 1980 yielded any return. The mining companies have been given such favorable terms that some have responded by selling forward years of future production. Now even large hedge funds have responded to these magical lease creations by borrowing and selling short thousands of tons of gold and silver. Giant financial institutions and bullion banks provide capital, expertise and guarantees to facilitate incredibly complex deals. There can be no doubt that this is big business. Dumb, but big.How did these loans/forward sales come about? About fifteen years ago, some enterprising Wall Street commodity guys at a very prestigious investment banking firm came upon the idea that would appear to satisfy the desires of a good number of potential clients with what promised to be very lucrative personal returns in the form of new fees. The idea proved popular beyond belief because it seemed to give the two chief principals to the transaction, central banks and mining companies, offers they couldnt refuse. To central banks and other government entities with large unproductive stockpiles of precious metal, the transactions offered an interest rate and unexpected cash flow for the “lending” of their metal. And best of all, since they were “loaning” metal, not selling it, the central bankers didnt have to report the transactions – they could just receive the income while carrying the metal on their books as if it were still in their possession since there was no question they could get their metal back at any time. The mining companies, in turn, could report to their shareholders high deferred prices, increased cash flow and protection from falling prices. The investment bankers, of course, did the best of all. This is dumb?
via DUMB AND DUMBER.
