The new Office of the Comptroller of the Currency quarterly OTC derivatives report for positions held as of March 31 was, once again, a stunner.
First, a few words on background about the report. This report is published by the OCC, a unit of the US Treasury Department, designed to highlight the Over the Counter (not listed or traded on an exchange) derivatives positions of the largest US banks in a variety of categories; with the largest categories being interest rate and credit derivatives. The purpose of the report is to head off and eliminate any serious risks to the banks and the financial system as a result of too concentrated or excessively-risky derivatives positions.
One of the categories is precious metals derivatives, largely gold and silver. You may recall, how over the past two years, I uncovered a very large silver derivatives position held by Bank of America which, theretofore, had very limited institutional experience in precious metals. As a result of me contacting the OCC about the unusually large silver position held by Bank of America, the only result was in it largely agreeing with my contentions (or at least not disputing them) and then with the OCC suddenly changing how it classified precious metals by going back to including gold in the same category as silver. This had the effect (and intent), since gold was a much larger market, of obscuring BofA’s silver positions.
However, the effect has proved to be short-lived, as the new OCC report makes clear, as both JPMorgan’s and BofA’s precious metal positions have soared in the new report. Please keep in mind that there is little specificity in the OCC report, other than the individual banks are identified and by the overall total notional values of the positions and not by net long or short classification. A general rule of thumb is that the price change of gold or silver over the quarter has a big influence on what the total notional value is for positions quarter by quarter.
In the new OCC report for March 31, the price of gold had advanced by around 9% ($160) from Dec 31, 2022 to March 31, 2023, so all things being equal and there were no big changes in positions over the quarter, all positions should have increased by roughly 9% (silver prices were unchanged form Dec 31 to March 31). Instead of an increase of around 9%, the precious metals holdings of JPMorgan increased by $53 billion (25%) to $253 billion as of March 31, while the derivatives holdings of Bank of America increased by $34 billion to $101 billion, or a stunning increase of 50%. (The increase in Citi Bank’s position was only slightly larger than the 9% increase in the price of gold over the quarter).
Here are the links for the new report just published, as well as the previous report for comparison purposes. Don’t be intimidated by this report as only one-page matters for our purposes. The trick to viewing and comparing the data is to download each report and then scroll down to table 21 in each report – which for positions as of March 31 is on page 25, while table 21 for the report as of Dec 31 is found on page 26. Remember, the reports are delayed for three months, so the data for March 31, is published under the date of June 15, 2023.
Let me give you my quick thoughts and please feel free to ask me for further clarification. Please remember, the data published is a rather sketchy overview and requires a good deal of subjectivity and speculation, but please know that I am not hiding behind the lack of greater detail in the OCC report in order to weave fantasies and would welcome compete transparency on the part of the OCC. Lacking that clarity, I’m forced to draw from data outside what’s disclosed to fill in the blanks.
Already concerned that the sudden emergence of Bank of America as a big player in OTC derivatives, basically out of nowhere a few years back, I concluded BofA’s position was essentially a short silver position of a billion oz, in which JPMorgan was the counterparty long and that the position was created by a lease and short sale of physical metal. Later, after silver was once again lumped together with gold in the OCC’s precious metals category, it became convincing that BofA also held as much as a 25 million oz gold short position, with JPM as the long, also as a result of a gold lease and short sale arrangement.
The new OCC derivatives report as of March 31, would appear to increase the existing gold positions. Because it seems highly improbable that there can be much, if any, physical silver left to lease and sell short in large quantities, it looks very much like the $50 billion increase in JPMorgan’s precious metals holdings and the $34 billion increase in BofA’s derivatives positions must be gold related.
For BofA, this means (to me) that of the $101 billion it held in total notional precious metals derivatives, after subtracting the $24 billion that a billion oz of silver would represent, leaves roughly $75 billion for gold or 37 million oz (at March 31 prices of just under $2000). This is up substantially from the 25 million oz I had previously calculated BofA was short in gold derivatives and making BofA short a billion oz of silver and 37 million oz of gold in OTC derivatives. I’m not so much concerned with JPMorgan’s even larger derivatives position, which looks to be long because JPM, with more than half a century of hands-on precious metals experience, would not appear to be heavily short at this time. Bank of America, as the new kid on the block, would appear to be short.
Even though I know of no way to predict prospective OCC derivatives reports, this new one really stunned me. As you’ll recall, gold and silver prices hit their lows for the year in early March, only to climb by close to $200 in gold and $4 in silver into March 31. At the price lows of early March ($1800 in gold and $20 in silver), Bank of America was actually ahead on its gold and silver short OTC derivatives positions – by as much as $3 billion – based upon an average price of its estimated gold position ($1800) and silver position ($23). As of now and March 31, it is back in the red for close to $7 billion ($6 billion in gold and $1 billion in silver).
I don’t know how much Bank of America could have bought back at the price lows of early March (likely not much), but at this point it looks like it didn’t even try to reduce its short OTC position. That’s what makes the new OCC report so shocking. These are big numbers. If (as seems reasonable to me) Bank of America increased its 25 million oz gold short OTC position by 12 million oz to 37 million oz, it means these positions tower over equivalent COMEX positions. 37 million oz is the equivalent of 370,000 COMEX gold contracts or double the total commercial net short position, while one billion oz of silver is equal to 200,000 COMEX silver contracts or five times the total COMEX commercial silver short position – and held by a single and highly inexperienced bank.
These are troubling amounts of precious metals derivatives held, essentially, by what looks like an inexperienced bank, overseen by a regulator that may be missing an important risk signal. This new OCC report only heightens my sense that something big has been brewing and about to become unchained in silver and, now, perhaps in gold as well.
June 19, 2023