For over a hundred years, a group of bankers have met at the stroke of noon to “fix” the price of silver. Once they conspire with one another and decide what they think the price should be, they publish their consensus to the markets and that is the gospel for metals that day…
“The fix” began in 1919, when five dealers met in the offices of NM Rothschild & Sons in the London financial district.
So, before we go any further, we have a backroom meeting at a Rothschild office, where global finance leaders determine the price for a commodity in which they have an obvious interest. These banks have precious metals orders either for themselves or for their clients, which seems like a conflict of interest in and of itself.
Even if one were not prone to conspiracy theories, this set-up couldn’t be any more suspicious. We’ll get to that later…
It has been announced that the silver fix will shut its doors for good on August 14th. So it stands to reason that precious metals investors and free market enthusiasts should be thrilled about the announcement. Right?
Not quite…
Unfortunately, this isn’t a case where you cut off the head and the body will die. The manipulation of these markets is alive and well, even after the “fix” shuts its doors. The silver fix is but one avenue these guys use to tilt the table in their favor…
But, manipulated as it may be, what does it all mean for the price of silver?
The Fix Is In
So, first things first, who are the powerful banks that decide the daily price of silver?
Here’s the triumvirate: HSBC, Deutsche Bank and the Bank of Nova Scotia. These three banks have decided the daily price of silver for years now. After meeting, their word becomes the gospel of the day, setting the price in which miners, jewelers, metals industry and – most significantly – financial institutions determine what to do with their silver that day.
Needless to say, it’s an extremely important benchmark…
It used to be a highly coveted spot; banks wanted to be a part of the fixing, either more openly for the prestige, or more nefariously for the opportunities it presented. So it was peculiar that when Deutsche Bank decided to pull out from the silver price fix a few months back, it couldn’t even find a bank to take its place. It just dropped out without a replacement.
“The banks don’t want any aggravation from current regulatory scrutiny,” one precious metals trader told Reuters.
In other words, if we can’t freely manipulate it, why even bother?
The other two followed suit, claiming that they couldn’t continue this arrangement with only two banks. I suppose that would have been too impartial? As if three banks was an unbiased, airtight agreement. In any case, one quick look at these banks tells us we should never have trusted them with this charge in the first place. Let’s have a look at their track record of market manipulations…
Deutsch Bank
Deutsch Bank – along with Societe Generale, Barclays, the Bank of Nova Scotia and HSBC – were sued by precious metals investor Kevin Maher earlier this year for manipulating the “gold fix”, which is the gold equivalent of the silver fix. In fact, if you look at the market action starting immediately when the call starts, you’ll see some very suspicious moves.
The entire call can take over an hour, and the banks can actually trade while on the call! You can tell by the flurry of activity as soon as the call starts.
From Bloomberg:
Caminschi and Richard Heaney, a professor of accounting and finance at the University of Western Australia, analyzed two of the most widely traded gold derivatives: gold futures on Comex and State Street Corp.’s SPDR Gold Trust, the largest bullion-backed exchange-traded product, from 2007 through 2012.
At 3:01 p.m., after the start of the call, trading surged to 47.8 percent above the average for the 20-minute period preceding the start of the fix and remained 20 percent higher for the next six minutes, Caminschi and Heaney found. By comparison, trading was 8.7 percent higher than the average a minute after publication of the price. The results showed a similar pattern for the SPDR Gold Trust.
“Intuitively, we expect volumes to spike following the introduction of information to the market” when the final result is published, Caminschi and Heaney wrote in “Fixing a Leaky Fixing: Short-Term Market Reactions to the London P.M. Gold Price Fixing.” “What we observe in our analysis is a clustering of trades immediately following the fixing start.”
“In a world where trading advantage is measured in milliseconds, that has some value,” Caminschi added.
That’s the understatement of the year. So the banks are either manipulating the price directly, or simply front running their clients for a quick profit. Either way, not an ethical or transparent way to run a business.
If they are front running, then it seems to land in the realm of high-frequency trading…
Which leads to the next issue: what will determine the price of silver once the fix closes shop? Will silver finally skyrocket after it sheds its bindings?
Where Do We Go from Here?
The fix will continue as is until August. The London Bullion Market Association is currently looking “to gather the views of the global market to find a solution which meets the needs of market users around the world”.
They had better hurry.
“They are really starting from scratch way too late in the game and I don’t know if they have the capacity managerially to move quickly enough to do something,” Jeff Christian from CPM group told Forbes.
We’ll probably see a combination of the old school “fixing”, mixed with prices based on the COMEX exchange and a physical order flow based on informational technology that wasn’t around when the fix began.
The London Silver Fixing Market is actually taking suggestions as to how they should measure the price of silver. I’m sure you all have some colorful suggestions. You can weigh in here until May 30th.
In the meantime, silver prices haven’t done a damn thing all year. Silver volatility is at a decade low, and has found some stability around $19. Practically every analyst – mainstream and contrarian – agrees that it simply cannot go lower. And when volatility stays this low, it has historically led to a serious price rally…
So, while we’re not necessarily backing up the truck quite yet, we are adding to our position in anticipation of a strong move up over the next year.
