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Silver Fix – What Is It and Why Is It Important?

The London Gold and Silver Fixing Companies set the prices for both gold and silver on a daily basis. The LBMA is responsible for the Gold Forward Offering Rate (GOFO) benchmark prices. These prices are globally regarded as the international benchmark for pricing of a variety of bullion transactions and products.

Since 1897, the London Silver Fix has been negotiated each trading day at noon through an auction between Deutsche Bank, HSBC Holdings Plc and Bank of Nova Scotia. This historic silver price “fix” is coming to an end in August of this year.

The Deutsche Bank stopped taking part in the Gold Fix in May after failing to agree on a sale of its seat. It postponed its planned April 29 resignation from the silver rate to Aug. 14th. During the fix, the three member banks declare how much metal they want to buy or sell for clients as well as their own accounts. Traders convey shifts in supply and demand to clients and take fresh orders as the price changes, before the fix is made. 

Regulatory focus on financial benchmarks is escalating after rigging was revealed in everything from interbank lending rates to currencies. Economists and academics have said fixings are vulnerable to manipulation and lack adequate regulation, while traders say the processes are effective and critical reference points for the market. A “fix” on price of silver to provide an accurate set price per ounce in the silver market.  By definition the ‘London Spot Fix’ is a price per ounce for each of the precious metals (gold, silver, platinum and palladium) which actually gets determined daily at 10:30 and 15:00 GMT by a brief conference call among the members of the London Gold Pool.  

Proponents of metals fixing argue that it is crucial and essential to the marketplace simply because it gives investors an accurate snapshot on pricing for a specific asset based on total volume of sales at the two given points in time when the group meets. Opponents of metals fixing argue that manipulation is always a threat to the continued usage of such a system and also that more modern systems should and can be used to share data without human interaction.

With the London Silver Market Fixing Ltd. stating it will stop running the fixing on Aug. 14, as Deutsche Bank AG’s planned exit as it scales back its commodities business. This would leave just two banks to conduct the price-setting ritual that’s used by mining companies to central banks. Companies including ETF Securities Ltd., the London Metal Exchange and CME Group Inc. have said they’ve proposed an alternative or have talked to the industry association about developing a replacement.

There are currently approximately ten companies interested in developing and running a replacement for the century-old London silver fixing benchmark. The London Bullion Market Association (LBMA) is set to review all applicants and create a shortlist in the near future. This shortlist will then take their best proposals and present themselves at a seminar in London on June 20, in a few days (at Merchant Taylors’, 30 Threadneedle Street, London). However the LBMA didn’t disclose the companies from which it received proposals. Earlier in the month the LBMA reported that a survey was conducted in May which showed the market wants an electronic, auction-based process and one that’s tradeable.

More than 440 participants completed an LBMA survey that also showed a new benchmark should have more direct participants. Sixty-four percent said they use the fixing daily and the usefulness of the current silver mechanism was rated an average of 7.5, on a scale up to 10.

While many companies will no doubt have a vast amount of planned proposals and feedback relevant to this matter it is anyone’s guess as to how this outcome will impact the current pricing.  We will be watching this with great interest.  Many analysts have already begun to sink their teeth into the notion that this may end what some refer to as a century of pricing manipulation and free silver from being held down in price.  Some of these same analysts argue that as it stands given the specific set of fundamentals in the silver market that silver should be trading closer to perhaps a ratio of 30:1 against gold at present.  If this were the case then silver would be priced at present around $42 per ounce.

This would be good news for silver indeed even as silver prices remain up through this week on fresh demand as a possible bottom around the $19 per ounce level has been hit.

 

Yours to the penny,

Darren V. Long

Guildhall Wealth Management Inc.

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