On Tuesday I posted on the latest US Office of the Comptroller of the Currency’s (OCC) quarterly report and how it showed a reduction in total precious metal derivatives. I took Zero Hedge to task for jumping the gun on posting before seeking further information but now I have to admit I was guilty of that myself, the result being I was wrong to claim of a 29% reduction in precious metal derivatives.
Zero Hedge and I both made the same mistake, which was to assume that “precious metals” in Table 9 of the OCC’s report included gold, which I think is a reasonable assumption as “precious metals” is commonly understood to mean gold, silver, platinum and palladium. The OCC confirmed to me by email that Table 9 excludes gold and gave me a snapshot of a section of the call report where, at least to the banks filling out the form, it is clearly identified that the “precious metal” category should exclude gold.
The OCC did agree to my suggestion to footnote Table 9 to clarify that the precious metals notional does not include gold but did not answer my question as to why gold was now included with FX, simply stating that “banks began reporting combined FX and Gold notionals because of changes to the call report, specifically schedule RC-R that require the two be categorized together”.
Since the Perth Mint is not a bank and doesn’t deal in these sort of risky derivatives, I have no insight into the reason for such a bureaucratic form change. My best guess is that it has something to do with Basel II and changes to “harmonize the [US] agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years”. A look at this notice of proposed rulemaking (the new rules started in Q1 2015) shows that Gold and FX are grouped together with the same derivative contract conversion factors (see below from page 196) – note also that the column names match exactly the reporting categories in Tables 8, 9, 10 and 11 of the OCC derivatives report. So we can blame the Basel bureaucrats for decreased transparency in gold market.
A small mercy is that we still have a continuing dataset for the white PMs (ie silver, platinum and palladium). Zero Hedge noted the 237% increase in this category, which is certainly unusual for these markets which are smaller and often less liquid than gold. A comparison of the Q4 and Q1 OCC reports reveals that 92% of the $53.1 billion increase in the notional value of white PM derivatives was attributable to Citibank, who increased from $3.9b to $53.0b.
In an email response to Nick Laird of Sharelynx.com who questioned this dramatic change, the OCC confirmed the figures were correct and provided the following screenshot of Citibank’s schedule RC-R as proof.
This reveals that almost all of the increase was in Citibank’s centrally cleared derivative contracts (circled in red) rather than in OTC markets (in green), which total $3,786m, very close to Citibank’s Q4 figure of $3,901m. That does make me wonder if the red figures are a fat finger and belong in a different row.
Bloomberg note that “Citigroup has been expanding in derivatives as it rebuilds trading businesses that suffered after the financial crisis led the firm to take a government bailout” and that it has “pursued a risk-managed expansion off of a low base to bring the firm in line with competitors” so maybe Citibank has been active in the white metals as part of this “rebuilding”. If that is the case, then it is possible that they have been doing the same in gold.
This then leads to the question of whether we can estimate the value of gold derivatives for Q1 2015 based on historical relationships between the gold, the white PMs and FX figures. The chart below shows the notional value of gold derivatives against three other OCC report figures.
Gold has been declining in relative terms over the past 15 years, but the last few years are more stable. If we take the average of the last two years for each of these relationships, then the estimated gold derivative notional value in dollars and tonnes would be:
Gold as 0.045% of Total Derivatives = $91,360m (or 2,394 tonnes, red star)
Gold as 0.433% of Gold+FX = $137,491m (or 3,602 tonnes, green star)
Gold as 3.644 times White PMs = $275,531m (or 7,219 tonnes, orange star)
To put those estimate figures into context, I’ve shown them as stars on Nick’s gold derivatives in notional tonnes chart below.
I think the red and green are realistic probabilities but the orange 7,219 tonne figure, based on the large Citibank white PM’s Q1 figure, just does not seem possible given there was no commensurate response in the gold price. This leads me to think that Citibank has only been active in the white PMs and it is not correct to extrapolate this action out to gold.
As to Citibank having a notional $53 billion worth of white PMs derivatives on their books, industry sources tell me that “Citibank are not that active in PGMs so if the figure is real, it would have to be silver and it would have to be something very unusual.” I have an email in to my precious metals contact at Citibank but he is on leave at the moment so no response at the time of this post. I’m not expecting a comment as Citibank declined to comment on the OCC report to Bloomberg, but I’ll post any update/explanation if I get it.