As Oil Trading Lags, Banks Make Bigger Gains in Gold, Silver

Global revenues derived from precious metals-related investments surpassed oil-based revenues for the bottom lines of over 50 investment banks in 2017.

This was the first time since 2014 that this happened in the commodities sector.

According to statistics compiled by Coalition, a financial industry analysis company, the 50 largest investment banks and financial institutions in the world made more than $1.6 billion by trading and selling derivatives in precious metals such as gold and silver last year.

In comparison, trading in oil commodities generated about $1.4 billion last year.

There are a few factors that can explain this turn of events. First, commodity-related revenues have been on the decline for most banks in recent years.

Increased government oversight and regulations have been a factor in limiting commodities exposure, especially in the poorly performing oil sector.

Low and stable crude oil prices, too, has dampened hedging activities.

According to Amrit Shahani, research director at Coalition, revenue from oil-related trading and selling on financial markets has appreciably declined since 2015.

Sustained periods of lower prices also has lessened interest among oil producers and consumers alike in financial products that protect against price volatility.

“It’s much more oil declining (than metals gaining). We’ve seen reduced client activity (in oil), reduced hedging from the corporates as well as low prices at the start of last year and low volumes,” Shahani said.

In the meantime, fewer banks exited the precious metals sector compared to oil markets.

Metal over oil

Precious metal revenues have been more relatively stable due to increased saving and hoarding of gold and silver by investors, businesses and banks. Metals also have experienced regular price surges since early 2016.

“Pretty much every bank maintains a precious metals business. It’s a much more stable revenue pool,” Shahani said.

Nothing lasts forever, of course. Oil volatility should be primed for a comeback, sooner or later, especially as global growth picks up.

Investors should be aware, too, that precious metals overtaking oil will not be a long-term trend.

The oil derivatives commodity market, which is larger than the precious metals derivatives market, will rebound as investment banks refocus their investing strategies in oil derivatives.

Although the revenue gains in precious metals have been remarkable, the gains are still a record low in a decade for both commodities.

In 2008, for instance, precious metals recorded over $3.9 billion in revenues while oil produced over $5.6 billion in the same period.