As many readers of the Daily Pfennig® newsletter may have heard, the London silver fixing is going to come to an end on August 14. This will be a major development in the silver market as many people feel there could have been price manipulation occurring under the current fixing process, and an overhaul of the silver fix should lead to more transparency.
The London silver fixing has been operating under its current format for 117 years, with the first fixing taking place in 1887 in the office of Sharps and Wilkins, which was one of the leading gold dealers in London at the time. Although the participants have changed since the beginning of the silver fix, the process of fixing the price has remained fairly consistent. The current participants in the silver fixing are Deutsche Bank, HSBC, and Bank of Nova Scotia. At noon in London each day, the three market makers conduct a conference call where an opening price is determined by the Chairman and, depending on buying and selling interest from the members, the price will then be moved up or down until the supply and demand difference is within 300,000 troy ounces (300 bars) at which point the price will be “fixed.” The process for the London gold fixing is virtually the same, although gold has an AM and PM fix. The problem, as many saw it, was that during these conference calls, the members were free to trade for their clients and their own accounts, giving them access to price information before the price was published, leading to a conflict of interest.
In January, Deutsche Bank announced they would be withdrawing from the silver and gold fixing, as they scaled back their commodities business, likely due to increased scrutiny across all financial markets attributed to price rigging scandals including LIBOR and the gold fixing. Deutsche Bank originally attempted to sell their seat in the fixing, but was unable to find a buyer. This was not a huge surprise as impending lawsuits probably scared away the potential buyers. So, left with only two banks participating in the silver fixing, it was decided that an alternative was needed.
On June 20, the London Bullion Market Association listened to various proposals for an alternative to the current fixing system, with eight different firms submitting bids. The winning bid went to the Chicago Mercantile Exchange (CME), which partnered with Thomson Reuters on their proposal. Other firms that submitted proposals included The London Metals Exchange (LME), Autilla LTD, and Bloomberg LP, among others. CME is one of the largest option and futures exchanges and also owns COMEX, so they have ample experience in the trading of precious metals. Combined with Thomson Reuters’ ability to capture the over-the-counter market in real time, the new fixing process promises to be more transparent by using an electronic auction-based system that will include more market participants, and will make public the volume of the bars traded, which is currently not done. The new system will be tested in early August and is slated to go live August 15 under the new title “London Silver Price.” If this is deemed a success, there will be added pressure to change the gold fixing in a similar fashion.
Generally speaking, the fixing is an important part of the marketplace as it sets an international published price that many market participants, including dealers, miners, refiners, central banks and investors, among others, use to price and value their contracts. On a retail level, this may not have much of an impact, as coin purchases are not typically priced off the fix. The main takeaway here though, would be: with more transparency, there is less likelihood of price manipulation. If you are one of the many that believe the silver price is being suppressed by the powers that be, then this will hopefully dissuade them from doing so, and could lead to higher prices, if, in fact, the price is being held artificially low. All in all, this should be a step in the right direction to clean up the markets, and actually get the silver market to a point where it is efficient and priced accordingly.
EverBank currently offers non-FDIC insured physical unallocated metals accounts in gold, silver, platinum and palladium. We price our clients’ unallocated trades off of these London fixes, so while this may not impact those trades directly, as there will be a “fix” going forward, it does help boost confidence that trades priced off the underlying fixes are being priced in a fair and efficient manner.
In addition to all this, rising tensions in the Middle East, Ukraine and Israel are shaping up to give metals a safe haven boost amid the normally stagnant summer months.
The London silver fixing has been operating under its current format for 117 years, with the first fixing taking place in 1887 in the office of Sharps and Wilkins, which was one of the leading gold dealers in London at the time. Although the participants have changed since the beginning of the silver fix, the process of fixing the price has remained fairly consistent. The current participants in the silver fixing are Deutsche Bank, HSBC, and Bank of Nova Scotia. At noon in London each day, the three market makers conduct a conference call where an opening price is determined by the Chairman and, depending on buying and selling interest from the members, the price will then be moved up or down until the supply and demand difference is within 300,000 troy ounces (300 bars) at which point the price will be “fixed.” The process for the London gold fixing is virtually the same, although gold has an AM and PM fix. The problem, as many saw it, was that during these conference calls, the members were free to trade for their clients and their own accounts, giving them access to price information before the price was published, leading to a conflict of interest.
In January, Deutsche Bank announced they would be withdrawing from the silver and gold fixing, as they scaled back their commodities business, likely due to increased scrutiny across all financial markets attributed to price rigging scandals including LIBOR and the gold fixing. Deutsche Bank originally attempted to sell their seat in the fixing, but was unable to find a buyer. This was not a huge surprise as impending lawsuits probably scared away the potential buyers. So, left with only two banks participating in the silver fixing, it was decided that an alternative was needed.
On June 20, the London Bullion Market Association listened to various proposals for an alternative to the current fixing system, with eight different firms submitting bids. The winning bid went to the Chicago Mercantile Exchange (CME), which partnered with Thomson Reuters on their proposal. Other firms that submitted proposals included The London Metals Exchange (LME), Autilla LTD, and Bloomberg LP, among others. CME is one of the largest option and futures exchanges and also owns COMEX, so they have ample experience in the trading of precious metals. Combined with Thomson Reuters’ ability to capture the over-the-counter market in real time, the new fixing process promises to be more transparent by using an electronic auction-based system that will include more market participants, and will make public the volume of the bars traded, which is currently not done. The new system will be tested in early August and is slated to go live August 15 under the new title “London Silver Price.” If this is deemed a success, there will be added pressure to change the gold fixing in a similar fashion.
Generally speaking, the fixing is an important part of the marketplace as it sets an international published price that many market participants, including dealers, miners, refiners, central banks and investors, among others, use to price and value their contracts. On a retail level, this may not have much of an impact, as coin purchases are not typically priced off the fix. The main takeaway here though, would be: with more transparency, there is less likelihood of price manipulation. If you are one of the many that believe the silver price is being suppressed by the powers that be, then this will hopefully dissuade them from doing so, and could lead to higher prices, if, in fact, the price is being held artificially low. All in all, this should be a step in the right direction to clean up the markets, and actually get the silver market to a point where it is efficient and priced accordingly.
EverBank currently offers non-FDIC insured physical unallocated metals accounts in gold, silver, platinum and palladium. We price our clients’ unallocated trades off of these London fixes, so while this may not impact those trades directly, as there will be a “fix” going forward, it does help boost confidence that trades priced off the underlying fixes are being priced in a fair and efficient manner.
In addition to all this, rising tensions in the Middle East, Ukraine and Israel are shaping up to give metals a safe haven boost amid the normally stagnant summer months.
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