U.S. Banks Precious Metals Derivative Exposure Surged In The Beginning Of 2017

According to the most recent report on the U.S. Financial Institutions Derivatives trading activity, the U.S. banks held a record amount of precious metals contracts in the first quarter of 2017. Not only did the U.S. banks report a record amount of precious metals contracts, but they also held an unprecedented quantity in notional value of commodity and equity derivative contracts.

There just seems to be a lot of paper floating around in our highly inflated stock, bond, and Forex markets. And… there needs to be. Without an ever increasing amount of leverage via their derivative bets and hedging, these markets would be in serious trouble. Furthermore, the practice of using contracts to hedge bets upon on other derivative bets has put the financial market in a highly fragile state.

The Office of the Comptroller of the Currency (OCC) put out its First Quarter 2017 Quarterly Report on Bank Trading and Derivative Activities. In that report, they published the following chart on the U.S. Banks’ notional value in precious metals contracts:

As we can see in the chart, the overall trend has continued higher since 2000. What is interesting is that the notional value of precious metals contracts held by the U.S. banks was even greater in the first quarter of 2017 versus Q4 2012 when the prices of the precious metals were much higher.

In looking at previous data, some quarters reported a larger amount of precious metals contracts, which was due to the banks adding short contracts as the price of precious metals increased. However, Q1 2017 of $43.6 billion was up considerably versus the $28.3 billion in Q1 2016.

For example, in Q3 2016, U.S. banks also held $43.6 billion in precious metals contracts. Again, this was due to a lot of short contracts held by the U.S. banks when the gold price surged to a high of $1,366 in the third quarter of 2016. As the gold price sold off over the next several months, the precious metals contracts declined in the fourth quarter of 2016:

We can see this in the last bar on the chart on the right. But what is interesting is the significant increase in U.S. banks’ precious metals exposure in the first quarter of 2017, shown in the first chart above, when the number of short gold contracts the large U.S. banks held declined significantly in the graph below:

Now, this is only showing the U.S. banks’ gold contracts. These contracts do not include other precious metals, such as silver, platinum, and palladium. However, gold is by far the largest market. If we include the FX contracts (forward exchange contracts), the total notional amount is enormous:

The total notional amount of U.S. banks’ FX & Gold Contracts was a stunning $34.5 trillion in the first quarter of 2017, up from $30.7 trillion at the end of 2016.  Here is the definition of a Forward Exchange Contract by Investopedia:

Forward Exchange Contract: A forward exchange contract is a special type of foreign currency transaction. Forward contracts are agreements between two parties.

Forward contracts are not traded on exchanges, and standard amounts of currency are not traded in these agreements. They cannot be canceled except by the mutual agreement of both parties involved. The parties involved in the contract are generally interested in hedging a foreign exchange position or taking a speculative position.

The nature of forward exchange contracts protects both parties from unexpected or adverse movements in the currencies’ future spot rates.

So, these FX Contracts are hedges on the movements of different fiat currencies spot prices. We don’t know the percentage breakdown of the Gold or FX contracts. However, I would imagine the majority being in the FX Contracts that are hedging the different fiat currencies.

Now, what is also quite fascinating about the massive increase in the FX & Gold contracts notional values, is that global GDP hasn’t grown that much since 2013. According to the World Bank, here are the global GDP figures over the past four years:

Global GDP (current U.S. Dollars)

2013 = $76.9 trillion

2014 = $78.9 trillion

2015 = $74.5 trillion

2016 = $75.5 trillion

If we divide the notional amount of FX & Gold Contracts by the global GDP, we can see a very interesting trend:

FX & Gold Contracts Notional Amount Divided By Global GDP

2013 = 28%

2014 = 32%

2015 = 40%

2016 = 41%

What we have here is a great deal more FX & Gold paper amounts trading versus the global GDP. In 2013, the FX & Gold notional amount by the U.S. banks accounted for only 28% of global GDP. However, it jumped to 41% in 2016. I would imagine in 2017, and it will be even higher.

While the notional amount of FX & Gold contracts has hit a record high, take a look at the next chart:

These two charts display the amount of “Commodity” and “Equity” contracts in notional dollar figures held by U.S. banks. While there was a temporary blip in 2005 (mostly longer dated contracts – in BLUE), there was a pronounced increase in 2015, 2016, and 2017 in both of these derivative asset classes.

According to the data by the OCC, the U.S. banks held $1 trillion in commodity contracts and $3 trillion in equity contracts in the first quarter of 2017. While these figures are much less than the FX & Gold contracts, they have still increased substantially over the past three years.

For example, in 2014, the U.S. banks held $431 billion in commodity contracts and $745 billion in equity contracts. In just three years, the U.S. banks exposure to commodity contracts has more than doubled to $1 trillion, and their notional amount of equity derivatives has quadrupled to over $3 trillion.

Again…. the U.S. banks are holding onto a record amount of paper derivative contracts in these different asset classes. Yes, it makes some sense that the U.S. banks’ total notional equity value is increasing right along with the rising highly-inflated stock market, but seeing the commodity exposure double when the prices of most commodities are much lower than what they were before 2014, is intriguing.

As the commodity index above fell from over 300 in 2014 to 176 currently, the amount of U.S. banks, exposure to the commodity market has more than doubled to $1 trillion. Unfortunately, I don’t know all the particulars as to why the U.S. banks have increased their exposure to such a great extent in these different asset classes. However, to see a record amount of paper trading in a market that is already highly leveraged points to big trouble ahead.

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17 Comments on "U.S. Banks Precious Metals Derivative Exposure Surged In The Beginning Of 2017"

  1. Re: “While there was a temporary blimp”, an interesting idea indeed. But I was interested in your inability to use the possessive throughout your exposition, e.g. “U.S. Banks Precious Metals Derivative Exposure” where Banks’ would be better, or “U.S. Banks notional value”, or “the U.S. banks gold contracts”.
    Also, “when the prices of the precious metals was much higher” shows a disregard for matching subject and verb.
    It’s just a thing with me: does sloppy English equate with sloppy thinking? I’m just a little worried.

    • Bill Philipson,

      Yes… you are correct. Thanks for bringing it to my attention. I updated my commented. I have finally decided to purchase the Grammarly software. Hopefully, I will no longer have to deal with sloppy writing.

      best regards,

      steve

      • That’s a good story Steve! Many of us, especially if we have been around for awhile can probably tell similar stories.

        BUT here is one for you, knowing how much you enjoy “Technical Analysis”! If you have a look at a Candlestick “QUARTERLY” Chart (On GOLD) you will find what is called the “Falling Three Pattern”, there is also a “Rising Three Pattern”. Here is the link:

        http://www.chart-formations.com/candlestick-patterns/three-methods.aspx

        The explanation should be self explanatory. The trend is at the crossroads. Being a “QUARTERLY” Chart we might have to wait until the end of September to be a bit more definitive in which direction the gold chart might go.

        The way I see it (And at the moment) this trend could go either way. To the upside it has to break $1375.00, to the downside $1046.00. We should know this before Christmas.

        • BTW being a “QUARTERLY” Chart, It is a very strong pattern.

          • And therein lies the problem analyzing charts of manipulated markets that were DRAWN by the PTB to give you signals and patterns that could go either way – i.e. the chart is not foretelling, it’s only a summary of their past “price” movements/manipulations, up AND (mostly) down. The term “gold price” is an absurdity in itself if one thinks about it long enough! Anyway, thanks for sharing this pattern, I did learn something new!

  2. Virginia in Eastern Oregon | August 23, 2017 at 7:47 pm |

    I wonder which of the Kubler-Ross five stages of death we are in. Denial? Bargaining? I’m still in anger myself. The Fourth Turning rolls on. Thanks, Steve.

    • DisappearingCulture | August 24, 2017 at 3:41 pm |

      One can go through the 4 stages of grief [before acceptance] out of the order she wrote about them…which was in the context of dying.. and be going through more than one at the same time.

  3. Robert Forshee | August 23, 2017 at 9:11 pm |

    Hi Steve,
    Truly shocking numbers.
    The increases shown are an indication that the .gov knows we are coming to an inflection point in the fake financial narrative and they are attempting to maintain the facade by any means available.
    We still have the Debt Ceiling and Budget Dog and Pony Show, and soft coup d’etat in progress. We have now started trade wars all over the place and more war in Afghanistan.
    Should we expect the usual results? Yes, and sooner than I anticipated.
    Bob F.

    • Agreed. But what is the reason for more exposure to commodities through derivatives? I can come up with two:

      1 more influence on markets when problems occur
      2 make more profits when commodity prices rise due to falling eroei (temporarily that may be)

      Other options?

  4. Hi Steve, some other names in alternative media have talked about this. But what do you personally have to comment about the farcical visit by Steve Mnuchin together w/ Mitch McConnell made on Monday to Fort Knox & announcing that everything is just great?

    (A visit literally overlapping duration of the total eclipse BTW. I believe Fort Knox, KY did fall in the eclipse totality zone. I’m not expecting you to comment about this seeming unrelated tidbit. It’s just that it’s a bizarre “factoid” & I wanted to leave it out there for the “kooky” types to observe. I know, I know. Bix Weir & Clif High have been the “Kooky” ones talking about nonsensical Grand Canyon gold. I’m being the bad one here blabbering about some kooky total eclipse tangents. 😉

  5. OutLookingIn | August 24, 2017 at 9:59 am |

    Some background.

    In 1993 the Bankers Trust sold derivatives to Proctor & Gambol who lost millions on the deal. Proctor & Gambol sued Bankers Trust saying these financial products were too complicated to understand.

    In 1998 the CFTC Chair Brooksley Born released a regulatory concept governing OTC derivatives. During the ensuing Senate and Congress hearings, Greenspan, Reubin and Summers shut her down and the CFTC has their teeth pulled by them. Non-regulation results and six weeks later LTCM collapses. Brooksley Born resigns in disgust.

    By 2007 derivatives were at $595 trillion and the financial system explodes. We are now once again at an inflection point of an impending financial explosion. Welcome back.

  6. Dave Kranzler does good justice to this giant charade pulled by Steve “Punxtapawney Phil” Mnuchin at Fort Knox.

    http://investmentresearchdynamics.com/where-is-the-united-states-gold/

    Things must be SEEEEEEERIOUSLY broken behind the curtain, that they would need to put on a theater so insane, even Hollywood freaks couldn’t come up with it.

    Hang on a second.

    Mnuchin had some Hollywood work background in the past. That probably explains it.

    These are the weirdest of times, every passing day brings on events weirder and weirder than the previous one.

    • DisappearingCulture | August 24, 2017 at 3:31 pm |

      I like the counterpoints by Kranzler, whom I know to be a “straight shooter”; We’ve exchanged articles & emails. Even someone with vault access doesn’t know the lease/ownership picture for what is there. I doubt the public’s gold is there, ownership unencumbered, with the fox guarding the hen house.

  7. For those who wish to donate – for a very worthy cause, since your posts are always very well researched and very informative – I wish you would add information about sending a cheque directly to you

  8. Virginia. In eastern Oregon | August 24, 2017 at 5:45 pm |

    Guess what? Steve’s address is at the bottom of his emails. I had to scroll down. I hope it is not breaking secrecy to post his address.
    C/O srsrocco report, PO Box 1911, Beaver, UT 84713

  9. Makes perfect cents to me. PM’s are slammed down to unrealistic levels ergo you need moar contracts to make money on them. Right?

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