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A New Piece of the Puzzle

Suddenly, out of nowhere BankAmerica has emerged as a major participant in precious metals OTC derivatives. This new fact is contained in the latest release of the Treasury Department’s Office of the Comptroller of the Currency (OCC) Quarterly Derivatives Report for U.S. banks. The report covers derivatives contracts in the over the counter (OTC) market as opposed to exchange-traded options and COMEX gold and silver futures. The OCC quarterly report is delayed by 3 months, so the new report released on March 23, covers positions held as of Dec 31, 2020. (Scroll down to Table 9 near the bottom of each report).  

One constant in these quarterly reports is that JPMorgan has dominated OTC dealings in every category for as long as I can remember, including precious metals. However, the new report indicates that BankAmerica has now emerged as a major participant in precious metals OTC derivatives. BankAmerica’s position of $8.3 billion (as of Dec 31), has, essentially, come into existence since March 31, 2020, when it was under $175 million.  What would account for the tremendous growth in BankAmerica’s OTC derivatives positions from March 31, 2020 to December 31, 2020?

One highly unusual development in 2020, was the unprecedented increase in physical holdings in the silver ETFs. Close to 300 million ounces came into the silver ETFs, starting around April 1 into the summer. In trying to explain where the physical silver was coming from at that time, I suggested that it was coming from JPMorgan in the form of a physical silver lease to other banks. The time line indicated in the OCC reports does point to my leasing premise. At the prices at yearend ($26.50), $8.3 billion worth of precious metals derivatives would come to just over 300 million ounces.

As to why BankAmerica would engage in such an apparently foolhardy venture of borrowing 300 million oz of physical silver with the promise of having to return it someday, you have to first understand the nuttiness of precious metals leasing. Someone with the physical silver (JPMorgan in this case) relinquishes the metal to an institution (BankAmerica). Aside from the promise of the physical return of the metal, JPMorgan also gets rental income. BankAmerica, not wishing to simply hold the metal because there’s no real purpose in doing so, turns around and sells the metal to a completely independent third party, in this case the silver ETFs, who’s investors pay cash money for the free and clear title to the metal. BankAmerica gets the full use of the cash ($8.3 billion) to do with as it pleases.

If silver goes down in price or stays the same, no big deal for BankAmerica, provided it can buy the physical silver back on the open market whenever it decides to. However, if silver prices rise sharply and it’s not so easy to buy back 300 million physical ounces, then BankAmerica has a problem. Twenty years ago, Barrick Gold and AngloGold had the same problem with gold leases and lost $10 billion each. If BankAmerica did borrow and sell the metal to the silver ETFs, as appears to be the case, it is now short 300 million ounces of physical silver, which is a heck of lot worse than being short 60,000 contracts of COMEX futures.  It has to be that JPMorgan bamboozled BankAmerica in this transaction.

BankAmerica didn’t suddenly wake up one day and decide to borrow and sell (short) 300 million ounces of physical silver. It’s much more likely that JPMorgan dreamed up the whole affair, since it and its related entities will profit mightily as a result.  The net result of all this lending, borrowing, selling and buying of 300 million ounces, is that the friends and family of JPM now own at least 1.2 billion ounces or 60% of the world’s 2 billion ounces of total world silver inventories. BankAmerica is now obligated to return 300 million ounces of physical silver to JPM someday. BofA is already in the hole for $2 billion since it borrowed the 300 million ounces at an average price of $18 or less and is already $7 underwater. At some point BofA will wake up (if it has not already awakened) and try to buy back its excessive and decidedly unprofitable silver short position. That attempt by BankAmerica will prove to be exceedingly bullish for the price of silver.

While I’ve confined my remarks today to the 300 million ounces that BofA borrowed and sold short last year, there is another 100 million ounces borrowed and sold short since the start of this year and all told, I would estimate that at least 400 to 500 million ounces of silver have been borrowed and sold short in total. This amount of shorted silver is completely distinct and separate from the formidable concentrated short position in COMEX silver futures. It is the combination of these two separate short positions, currently totaling as much as 850 million ounces that explains the otherwise inexplicable insanely low price of silver. Furthermore, that much silver could never have been bought in the open market without launching the price to the heavens.

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