Banks’ commodities desks have bought silver in March while others where selling during the Covid-19 panic © Kerem Uzel/Bloomberg

There’s a City of London saying that where there’s a tip, there’s a tap. Or, inside information is usually someone trying to sell you something.

Around May and April, I started hearing more about silver. Nothing indiscreet, just that I should be thinking about it. In my usual contrary way, I wrote a silver-sceptical column in July, pointing out what had happened to silver bulls in the past, notably the Hunt brothers in 1980.

In the meantime, a sad story had been playing out in European bank corridors. There is vast overstuffing and undercapitalisation, which, this year, means some departments would have to go. The highest ratio of potential embarrassment to revenue would be the departments engaged in commodities trade finance.

Part of this collective decision had to do with the increased intensity of anti money laundering efforts. And, in fact, if you want to launder large amounts of money, entering into a multi-cornered commodities trade transaction is a pretty good way to do it. After all, one ton of an element, such as niobium, gold, or silver is identical down to the atom to the next ton.

And there were always other compliance problems turning up, whether it’s Americans looking for Iranian oil, or overextended Asian traders. These attract fines that can be a multiple of the business involved.

At BNP Paribas and ABN AMRO Bank, the general downsizing of commodities finance was announced around the end of the second quarter. Other banks trimmed their commodities departments with less fanfare.

It was not as though there was no commodity finance left. Chinese banks such as ICBC or, sometimes, Russian traders ready to offer silently guaranteed letters of credit, have been stepping in to fill the void. JPMorgan provides some commodities finance, but does not seem too interested in new customers.

However, there was one last time this past year when the Western commodities finance desks had a role. In March, during the dollar liquidity crisis set off by the Covid-19 panic, the commodities desks acted as market makers. That is, they bought when others were selling.

And there was, apparently, a lot of silver to buy. “London” vaults, which really means featureless warehouses near cargo airports somewhere in England, recorded their largest ever reports of silver on hand in March: 1,175,737,000 ounces (avoirdupois).

There was also a lot of gold on hand, but there were more buyers for that, including respectable ones like central banks. After all, gold is recognised as a monetary asset by the Bank for International Settlements, right alongside other non-exchange-controlled Article 8 currencies.

As always, though, another door opens. Nobody respectable wants to trade commodities in central Africa — but ETFs are a growth business.

And, according to Jeffrey Christian of CPM, a metals advisory group: “It seems much of that silver on hand was converted into ETFs through swaps”. London holdings of vault silver declined after the market-making wave in mid March. And, as Christian says “a total of 334.3m ounces of silver have been swapped for ETF shares so far this year, 322.4m starting in March through August”.

There was one increase of nearly 20m ounces of silver into ETF shares that happened at the very end of June. The largest apparent mega-swap came from July 21 to 24, when just short of 25m ounces slipped into ETF form.

The great thing about a bank group having an ETF asset on the books, as distinct from metals or commodities contracts, is that there are fewer compliance people worrying about it. And it is easier to gradually unload to retail.

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A job made all that easier by silverheads on forums such as Seeking Alpha. As the banks’ position shifting got closer to the end in late July, online commentators obliged with advice such as “silver investment demand is exploding . . . unleashing a powerful virtuous circle for silver with buying fuelling buying”.

The price spiked. The traders on the commodities desks packed their boxes. Coin buyers, late as always, accelerated their “stacking” of American silver in August.

Referring to the ETF swaps, Christian observed that “not being aware of this development could lead market participants to over estimate the demand for physical metals and assume a more bullish opinion”. Or as a now-retired silver trader reminds us: “Silver has always been subject to manipulation.”

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