Y2k, Buffett, and Silver

February 16, 1999

Don't worry, this is not your typical Y2K piece. I haven't decided to suddenly start writing about that problem, although, thanks to the Internet, I have been reading about it extensively. Besides, I try not to write typical articles anyway. And Warren Buffett is not part of the Y2K discussion, although he definitely is part of the silver story. The average reader is not going to be called upon to make some special preparations for the turn of the calendar, but he might infer some actions if he believes what I have to say. The only actions I'll be suggesting will be directed to the maybe 100 eyes belonging to the silver and gold Central Bank lenders.

While there has been unending commentary on the Y2K problem, no one has been able to state concretely just what we will see as a result of the millennium change. Let me be the first to come forth with a dead solid certain prediction. That prediction is that precious metal loans, particularly silver, will go into default. No equivocation, no qualification - they will be defaulted on. What do I mean by default? I mean there will be a wholesale rearrangement of their original terms and conditions, and the lenders will be told they can't have their metal back. The lenders may receive some type of compensation, but they will not end up in anywhere near as good a position as they would have been, if they had never participated in these fraudulent devices in the first place. Some lucky Central Banks, but only a few at most, might escape the coming loss and shame if they take special emergency Y2K preparations immediately.

How can I be so sure of my Y2K prediction? Well, the certainty has more to do with metal loans than the year 2000. Y2K, if we get that far without default, will be the irresistible excuse to declare default and renegotiate all terms and conditions of silver metal loans, no matter what the level of problems we have. Hell, if the borrowers and guarantors of these loans are going to default anyway, as they must, why not blame it on Y2K?

The only real question is do we get that far - can we make it until the end of the year until there is massive default on silver loans? And why should a lender of silver care? After all, the one thing that assures all lenders is the AAA financial rating of the guarantors - the middlemen in the metal loans. This has lulled the Central Bank lenders to sleep while thousands of truckloads of gold and silver has been carted off their premises, never to return. "But I have Triple A paper, from the biggest financial firms in the world, promising return of my metal", is the universal retort of the lenders. Yes, you can sue them, and you might even collect monetary damages. But consider this - when the market recognizes the true shortage of the physical item (as may be happening now in silver), and no more silly lenders are willing to part with their metal to temporarily depress the price artificially, the lease scam is over. Once the scam is over, i.e., no more new lending metal is forthcoming, Y2K won't matter - no one, and I mean do no one, gets any silver back. What that will mean to the silver lenders is this - you will be forced to accept a financial paper settlement, whose terms will be dictated in a foreign jurisdiction, by an army of foreign lawyers. Think of how much better a position you would be in, if you had physical possession of your metal when the scam is exposed, instead of someone else.

There is a real race to the year 2000 going on as we speak, between the lenders and borrowers of silver. The borrowers, or more precisely, the guarantors, are way ahead. They are rooting for 2000 to come soon. Y2K represents safety to them, a get-out-of-jail pass. The lenders haven't even started running yet, and as a class they are doomed to lose. But a couple might escape their doom, if they start running now. In the coming silver price surge, what do you (the lender) think would be better - physically holding a commodity in sudden shortage or a piece of foreign paper promising its return.

For the rest of us, the current surge in silver lease rates should serve as (another) wake up call. There is one reason, and one reason only, why lease rates on these crooked metal loans suddenly surge. That reason is there has developed in the cash (real) market a severe shortage. Lease rates don't surge by a factor of ten, twenty or thirty times, in a short period with no good reason.

Please think about this carefully, as I may not have conveyed this point clearly enough in the past. This recent surge in silver lease rates proves that the silver market is manipulated by the very existence of leasing and the record short position in COMEX futures and call options. By paying 10%, 20% or 80% "interest" to buy cash silver, means just this - someone is paying a big premium for real silver. (Please keep in mind, the "quoted" leases rates may have no bearing on what the real rates are. These are notoriously private transactions, in which all parties involved, except the hapless lenders, have a vested interest in reporting low rates. If you see 10%, think 20%, 20% think 50%). So while you see and transact at $5.50 on the COMEX, the real cash market is trading at $6 or $7. Think about this - why would anyone pay premium rates in the London closed-door market for silver via lease, if they can get silver that much cheaper on the COMEX? What do transatlantic phone calls cost? Shockingly high and rising lease rates like we see now and saw last year mean a big premium for real silver which, in turn, indicates shortage. Why is that not reflected in the COMEX flat (non-spread differential) price? After all, silver is not seasonal - the new silver apple crop is not coming in next month to depress prices then. The conventional answer is that the COMEX is not designed to be a cash exchange, it's a futures exchange. But this current situation goes beyond that. There should be some stronger relationship between COMEX silver prices and real silver prices. In the past two weeks we've seen the large commercials sell an additional 100 million paper ounces net, keeping a lid on prices, as the cash market tightened. It is not important whether the commercials succeed in shaking out the technical funds with lower prices. My point is that you can't buy cash silver, in quantity, on the COMEX, or anywhere else, at COMEX prices. The borrowers (industrial consumers and speculators) are smart enough to know where the cheapest cash silver can be bought. They don't buy on the COMEX, because they know, even if they follow the rules, there is no cash silver in quantity. Let me repeat that - presently, you can't buy quantities of physical silver anywhere in the world at COMEX prices, you would have to pay substantially more. Now, consider that the COMEX silver has the largest short position the world has witnessed (700 million ounces in futures and calls). If you can't make the connection between COMEX's silver price being the lowest in the world and a world record short position - contact me through Gold-Eagle, and I'll spend more time on it. But don't do it too loudly, you might wake the ferocious guard dogs at the CFTC, et al.

One person who obviously has made that connection is Warren Buffett, the world's most successful investor. I've been thinking about Mr. Buffett lately, as my piece a fortnight ago indicates. One of those thoughts is how entertained Mr. Buffett must have been to read Martin Armstrong's recent comments about how Mr. Buffett made a "serious mistake" in his well-known silver purchase. As the world's most enthusiastic silver bear, Mr. Armstrong can be excused for his extreme statements, but it got me to thinking that one of his more outlandish predictions - that silver was going to $3 - actually came true. You see, the sub-$5 cost basis for Buffett's purchase must be reduced by the dollar or so leasing fees that Buffett received in consideration of lending silver to avert a default last year by the shorts. I bet Mr. Buffett really gets a kick out of Armstrong.

But the other thought I had of Mr. Buffett was more profound. Let me preface this by telling you I am not a hero worship kind of guy. I am cynical about how society looks up to its celebrities of all walks, and I think it reflects a poor value system in general. But, when someone accomplishes something really out of the ordinary, by his or her own doing, then that accomplishment should be recognized. What Mr. Buffett did in silver was so spectacularly executed, that in the history of the investment world, it will rank as one of the greatest achievements of all time. In sports it would be the equivalent of hitting 100 home runs in a season, of running a two-minute mile, of circling the earth by balloon twice before landing. It would not do justice to the accomplishment, by nodding and saying a year or two from now, that Mr. Buffett really hit the jackpot when we read of his selling his position at ___ (fill in the blank with a double or triple digit number, no decimal points). What Mr. Buffett did, quite simply, is to amass the last and largest position in silver that will ever be available at anywhere near $5 (or 6 or 7 or 12 or 20). This is an investment item recognized by everyone in the world - past, present and future. Plenty of investors (maybe tens of thousands worldwide) with the financial wherewithal and intelligence had the opportunity to amass such a position. But there was only room for one. It can never be done again. Never. Think about it - this silver market is going to bust up one of these days (hopefully, real soon). Currently, it's tighter than drum. It can't handle the lease rollovers, how could it accommodate someone new buying 100 million+ ounces at $10, let alone $5. Mr. Buffett has rightfully earned a new place in financial history.

The real great thing about Warren Buffett's accomplishment is that he did it on a part time basis, it was not related to his main investment endeavor, which he's already recognized for. He didn't cheat anyone. He used a publicly traded broker. It was a passive investment. Anyone could have done it - but only he did. If someone hit 100 home runs, you wouldn't wait a year or two to congratulate him. Not only did he hit the equivalent of 100 home runs, his very act of buying silver when he did, precludes anyone from doing it ever again at $5. The more I think about it, the more awesome it becomes. While you can't do it on his scale - no one can anymore, you might be able to come close on a smaller scale. In any event - way to go, Warren.

Gold weakens on global cues and lackustre demand