End of the Silver Fix‏

That was interesting. Here's something else on silver.

Since 1897, the price of silver has been determined, or heavily influenced, by a small group of bankers gathering in London. Historically the bankers sat around a table at the noon hour, though in modern times the telephone has sufficed, and they announce at what price they would buy or sell silver to each other. Once a price triggers no buying or selling activity, the group declares the price of silver fixed. This price, called the London “Silver Fix,” has been a key benchmark used by traders and mining companies to determine the prices they would pursue in selling their silver all over the world.

It was an imperfect system but necessary at the time. When an industry trades on information, such as buy and sell prices, it’s important to have an expert opinion to guide that process along. With the rapid rise in communications, and the internet, real-time information has replaced many of the functions that these experts once served. Remarkably, the process has endured despite all the evolutions in trading in the last century. Many in the precious metals industry assumed the fix was always going to exist.


Quarter Eagles

The End of the Silver Fix

That’s why it was a shock when it was announced that the silver fix will be dead after August 14th, 2014. Deutsche Bank, one of the three banks setting the prices for the metal since 1999, recently announced that it was resigning from the fixing panel and largely exiting the commodities business. That leaves only HSBC and Bank of Nova Scotia on the silver fixing panel, but due to regulatory interests in the fixing process and potential litigation, nether bank wishes to continue. With the departure of Deutsche Bank, and no other banks eager to play a part in fixing the price of silver, the death of the silver fix is all but assured.

A large part of this is due to increased regulatory scrutiny on the fixing process amid concerns that it could be manipulated to benefit specific parties. Recently both JP Morgan and HSBC were accused of rigging the silver price downwards and engaging in late day trading to derive benefits from huge short positions in the markets. Obviously the system is can be manipulated. The smart move, legally and in the public perception, is for the banks to distance themselves from the silver fix for good.

Free Market Manipulation

Many see the end of the silver fix as a triumph of the free market. Now the price of silver can be free from the manipulation of a few wealthy interests. But, with billions of dollars on the line, are the financial institutions that made a killing on manipulating commodities prices just going to give up? Or is there something more sinister at play? While the silver fix has been largely irrelevant for years, at least it gave some transparency to the markets. Now, with no public pricing, the markets are in danger of being manipulated in much more devious ways.

The stage is now set for banks and commodities traders to potentially subvert the price of silver, organizing massive shifts in price that could potentially harm average investors. False supply shortages and misinformation causing the public to panic are old but effective tactics that the silver fix generally prevented. Now, we may see the return of these old school methods of manipulation. One might say that a world of free information would prevent manipulation from ever taking place again, but the recent activities of the most nefarious trading company in history, Glencore Xstrata, show otherwise.

How Glencore Cheated the System

Glencore was the brainchild of billionaire trader and international fugitive Marc Rich. Known for taking advantage of weaker opponents, legal loopholes, and geopolitical strife in order to corner various commodities markets, Rich rarely walked away from a deal without crushing the competition. He taught his successors at Glencore well. In 2013 Glencore Xstrata, along with Goldman Sachs and JPMorgan, were accused of conspiring with the London Metal Exchange in hoarding aluminum and violating antitrust laws. It was a classic artificial shortage scam, perpetrated by international financial institutions. They manipulated the supply of aluminum by hoarding and keeping a large amount of aluminum off the market. This coerced the behavior of the market, allowing these financial behemoths to bilk honest companies out of billions of dollars. Despite the price of aluminum being set by the commodities market, Glencore and its partners were able to influence the market for their sole benefit.

Could this happen to the silver market?

Absolutely. As long as the pricing controls remain hidden, underground, out of the sight of industry watchdogs and the public we will always live under the constant threat of market manipulation. Thankfully we can see the problem and work towards a better solution, one that allows the movement of the market to proceed unfettered in the public eye.

One thing is certain. If the price of silver is freely allowed to move where the real market wants it after the end of the silver fix in August, the price is very likely to soar. You would be wise to buy silver while it’s still affordable.