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The Silver Business: Silver Trading At Philipp Bros.

The Silver Business: Silver Trading at Philipp Bros.

December 8, 2016

Chapter 37 in the exclusive series for Dynamic Commodities- becoming a commodities trader

Borrowing and lending gold is the key to profitability in that business. However, most central banks around the world do not hold silver as a reserve asset. Therefore, silver trading is a lot different than the gold business.

When it comes to silver, Philipp Brothers made a fortune in the late 70s and in 1980. They did this by refining silver coins and scrap into bars. Then they delivered the ingots against short futures positions on the COMEX Exchange. Gold is a financial commodity. Silver also has a long tradition as a financial instrument. However, the volatility and price of silver attracts more speculative interest than any other precious metal. The structure of the silver market is the same as in gold.

There is an active over-the-counter market in silver with its hub in London. Silver trades on both an unallocated and allocated basis, exactly like gold.  Market-makers or bullion dealers make two-way markets, or bid-offer spreads, on unallocated silver for delivery at a London Bullion Broker or Bank. Philipp Brothers operated as a London Bullion Bank in both silver and gold.

In New York, London and Hong Kong, Philipp Brothers’ silver traders spent their day quoting bid-offer spreads. When a counterpart in the market traded, the dealer would look to either offset the risk or build a position.

The refining business in silver boomed as the Hunt Brothers attempted to corner the silver market in the late 1970s. The Hunts caused spreads between silver scrap and the price on the futures exchange to widen. This occured to a point where the business was profitable. A dealer with enough capital was able to make tens of millions buying scrap and old coins, and selling futures. However, after the price declined from $50 per ounce in 1980, the spreads narrowed and the business became less profitable.

As the silver market is more speculative that gold, so is silver trading. Traders resorted to long or short risk positions to supplement the profits from arbitrage. The gold dealers had a franchise when it came to borrowing and lending. This was because of Philipp Brothers’ ability to attract central bank gold. Silver traders did not have the same luxury. They had to grind out profits using their market acumen to guess on short term price moves and get them right.

Gold was the central focus and the cash cow of the precious metals business. Silver was the trading sardine.

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Post Series: Origin Of A Commodities Trader

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