What is a Short Position?
Investopedia states that a short position, “is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price.” For example, shorting silver is when you borrow silver with the promise to pay back the same amount of silver you borrowed. Usually, the silver that was borrowed is exchanged for dollars. At some agreed upon time in the future, the amount of silver that was borrowed is owed back to the lender. If the price of silver is lower than the price of silver at the time it was borrowed, then you can make a nice profit by purchasing silver at the lower price and repay the silver borrowed with the silver bought at the lower price. If the price of silver, though, goes up from when it was borrowed, then the silver to be repaid will have to be purchased at the higher price, thereby a substantial loss could occur.
Bank of America’s Position
Ted Butler, with Butler Research LLC, provides analysis on the gold and silver markets. He has studied the Office of the Comptroller of Currency’s (OCC) Quarterly Report on Bank Trading and Derivatives Activities and has surmised that Bank of America holds a silver short position of 800 million oz. The most recent OCC report was published on December 20, 2021, and can be downloaded by clicking here. This report runs data through the end of the third quarter, ending September 2021. Note, these tables most likely show silver as the major precious metal represented.
Butler’s suspicions can be followed by viewing the report and more specifically Table 21 on page 26. Bank of America is shown with $18.266 billion of precious metals derivates, expiring within 2022. Eighteen months prior, Bank of America’s derivative position was only at $173 million, which can be seen in Table 9 of the Fourth Quarter report published in March 2020. This large rise from $173 million to $18.266 billion demonstrates the large position that Bank of America has accumulated over an 18-month period.
Butler derives the short position of 800 million oz of silver, by “dividing the Sep 30 holdings of BofA of $18.3 billion in the new OCC by the $22.20 closing price of silver that day, the result is more than 800 million oz…”
Here is the Issue
If Bank of America is truly in a short position of 800 million oz of silver, then they have to pay back the silver when the contract expires. Then for every $1 higher in price than they borrowed or leased the silver, they will realize a $800 million loss. For every $10 higher, then they will realize an $80 billion loss.
Regardless of the what the price of silver will be at the time Bank of America has to pay back the silver, they will have to buy the silver to repay the silver. According to Statista, the annual amount of silver produced globally is 25,000 metric tons or 881,849,048 oz. Essentially the amount of silver that Bank of America will have to pay back is just under the annual total production of silver.
Provided that Ted Butler is correct, then the purchase of 800 million oz of silver that Bank of America will have to purchase to cover its short position will certainly put pressure on the market.
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The above represents the opinion of Steve Sands, not only in terms of what each author has stated, but also his and based on the time of writing. Mr. Sands’ opinions are his own and are not a recommendation or an offer to buy or sell securities, commodities and/or cryptocurrencies. As trading and investing in any financial market may involve serious risk of loss, Mr. Sands recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and always do your own due diligence and research when making any kind of a transaction with financial ramifications. Although Mr. Sands has an MBA with a concentration in finance, he is not a Registered Securities Advisor; therefore, Mr. Sands’ opinions and analysis on the markets, including stocks, commodities and cryptocurrencies are his own and cannot and should not be construed as a solicitation to buy or sell.