Investors in silver might have been unaware that the price of silver has not determined by the market but rather set in the United Kingdom. This has been the case for the past 117 years. The practice of silver fixing began in 1897 at a London office of Sharps & Wilkins. The price of silver was determined with the aforementioned and the former dealers Mocatta & Goldsmid, Pixley & Abell, and Samuel Montagu & Co. For a hundred years traders took order books to a closed room every day. They would then agree to a set price after about ten minutes. The newly negotiated price would then be given to the elite group’s appointed chairman. This person would originate from one of the participating banks. From there prices would be adjusted so there would be a balance between selling and buying.
Beginning in 1999 traders in silver were permitted to check with major clients by telephone, to possibly change orders before the price was fixed for the day. The practice did provide a benchmark that was stable,which is crucial for jewelers, mining companies, and long term investors. However, the system was lacking any real regulation and could be open to possible manipulation.
The system of silver price fixing has been under criticism for some time. There have been demands by commodity traders and investors in silver for more openness and transparency in the market for years. There was increased concern how benchmarks were being set for both the purchase and selling of silver. In a yearly market of $5 trillion USD (United States Dollar), it was deemed unseemly to just have a few banks determine what the price would be for this commodity.
In recent times three banks that had the responsibility of setting the price of silver. These included Bank of Nova Scotia, HSBC Holdings, and Deutsche Bank AG. The end of silver fixing became obvious when Deutsche Bank AG stated it would no longer participate in the system. The reason being given was that the bank based in Germany was scaling back the business it conducts in commodities.
Some analysts theorize that the move by the German bank to withdraw from the system was more likely the result of avoiding legal difficulties that are associated with silver fixing. The latest evidence of this was a new law suit filed in the United States filed on July 25 of this year. The suit brought by an investor in silver accuses all three banks of manipulating the price as well as it’s derivatives. The Bank of Nova Scotia publicly stated it was going to vigorously defend it’s role in the practice of silver fixing but the other two banks failed to comment.
The impetus for Deutsche Bank AG might have been provided by the raid of a number of oil companies conducted by European authorities in 2013. The companies being investigated included the giant energy firms of BP, Royal Dutch Shell, and Statoil. The probe included Platts, an energy news and price publisher. The accusation was potential price manipulation.
This year the Financial Conduct Authority of Britain which had investigated a number of banks involved in gold fixing of 2012 went ahead and actually fined Barclays. The ruling came in May after it was determined that a trader there sought to influence the gold fix.
Coeur Mining which is the largest producer of silver in the United States, has publicly supported a change for a system that it claims is now outdated. A new instrumentation will enhance confidence in setting benchmarks which will be used as a reference for the valuation and trading of silver holdings.
It has become quite apparent, especially since the 2008 financial meltdown, that there is increasing evidence of price manipulation in the commodity markets. It is not just limited to trading in precious metals. It even includes inter-bank loan rates to a number of world currencies.
As more companies are being subjected to increased regulation and scrutiny there has been a call in the industry for more openness and transparency.
The old price fixing system in silver has now been replaced by an electronic,
auction based mechanism. The new LBMA Silver Price mechanism will now be run by CME Group Inc. and Thomson Reuters Corp. These two companies will engage the new silver system each day at midday in London.
The new system was put in place on August 15th. The new trading mechanism allows for more direct participation for investors in silver. The automated auction feed ensures that the same real time information is available to all participants in the market. The data will be available through numerous vendors all at the same time.
Under the new system of rules, interested parties will enter orders electronically to trade at a proposed starting price. If no suitable match results between the buy and sell orders, an algorithm will pick a new price for a second round of bidding. Each consecutive round is to last no more than 30 seconds. Each cycle will display Bid and Ask Volumes through to a settled rate.
If the new price mechanism works for silver, it is expected that the fixings in gold, platinum and palladium will follow later this year. Gold alone is an annual $18 trillion dollar world market. It is more than three times the value in silver trading.
Some industry analysts are predicting that the changes taking place will restore confidence in the system and lead to greater participation in the commodity markets in particular.
Gone will be the custom of traders halting the trading process by calling for a flag where client orders were amended. That tradition originates from the gold trading fix. This was where gold dealers in the past had small British flags that they would employ whenever they needed a pause in trading.
It can be expected that there will be increased volatility in the price of silver throughout the day and more rapid movement in the market overall. However, the new system allows all participants to be level on the same playing field. It may also allow for greater profit potential as well.