Silver Fundamentals and US Bank Holdings

The Trend Beacon’s 28Sep15 edition examined the global Silver market relative to the precious metals holding of insured US Banks as reported in the Office of the Comptroller of the Currency’s (OCC’s) 1Q2015 Report on Bank Trading and Derivatives Activities. We expect substantial price volatility in precious metals is on the horizon. Here’s a reprint of the article:

Featured Article: Silver Fundamentals and US Bank Holdings
September 26, 2015 by murph

Only 31% of 2014 silver production came from primary silver mines where silver is the main source of revenue. Approximately 68% was associated with lead/zinc (35%), copper (20%), and gold (13%) production. The following chart displays the components of global silver supply for the 2005-2014 period.

World Silver SupplyAll global silver supply and demand data in the following charts are provided courtesy of Thomson Reuters GFMS and The Silver Institute (www.silverinstitute.org)

Falling metals prices has taken its toll on global mining operations. After 12 straight years of gains, global silver production is expected to fall in 2015. With profits under pressure, silver mining companies have focused on cost cutting.

The chart to the right displays the components of global silver demand for the 2005-2014 period.World Silver Demand Demand growth over the period has been led by coins & bars (investment attribute) and photovoltaic demand (industrial attribute).

Industrial silver demand is expected to grow at an accelerating pace off the back of increased photovoltaic demand, which in turn will be driven by reduced electrical storage costs. Advances in battery technology are expected to reduce the cost of electricity storage by 50% by 2020, and by 50% again by 2024. The net impact will be increased photovoltaic demand.

The chart to the left displays global silver demand with focus on investment demand. World Silver Investment DemandInterestingly, investment demand has remained robust over the last four years, despite lower silver prices. Additionally, investment demand growth over the last four years has primarily focused on physical coins and bars while ETFs have seen little inventory build.

Current metals prices are insufficient to justify mine expansion, not to mention new mine development. Any substantial uptick in demand, whether it be industrial or investment driven, will drive silver prices higher. Such movements could be sudden and volatile.

Based on the Office of the Comptroller of the Currency’s (OCC’s) 1Q2015 Report on Bank Trading and Derivatives Activities, insured US commercial banks appear to be substantially increasing their positions in precious metals. The following chart, courtesy of the OCC, identifies historical holdings of precious metals ‘contracts’ in $US billions.

OCC Precious Metals 1Q15

Holdings increased from $22.4 billion in 4Q14 to $75.6 billion in 1Q15. Further OCC reporting suggests the 1Q15 precious metals activity can be linked to JP Morgan Chase, Bank of America, Citibank, and/or Goldman Sachs. We searched for, but are not able to confirm:
– the split between precious metals (gold vs. silver vs. platinum, etc)
– the split between exchange traded vs. over-the-counter contracts
– the degree to which the ‘contracts’ are backed by physical holdings, or
– whether the ‘contracts’ represent long or short positions.

To place these figures in context, the total market cap (open interest x contract size x $/oz) of the sum of the gold, silver, platinum and palladium futures markets at The CME Group is $65.8 billion.

Furthermore, the total eligible physical inventories on record at CME Group as of 25Sep15 are as follows:

CME Group Eligible Table

The 1Q15 leap in OCC reported precious metals ‘contracts’ held by insured US banks is substantial relative to the US futures market and eligible physical on hand.  (End of article.)

The Trend Beacon is a weekly commentary with focus on select global natural resource markets. Our goal is to add value to your investment decision process through the delivery of long-term and short-term perspectives in the energy, metals, and agricultural markets.

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Posted in Copper, Equities, Gold, Metals, NASDAQ 100, Palladium, Platinum, S&P 500, Silver, Uncategorized Tagged with: , , , , , , , , , , , ,

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