Opinion & Insights

SILVER FIX – Not Fit For Purpose R.I.P.

Somebody needs to say it … so I will. The LBMA silver price (aka the silver fix) is not fit for purpose.

A journey that started with false claims that the old fixing methodology was flawed only to be replaced by an IOSCO compliant model driven by a technically driven, manipulation-resistant, all engaging and transparent solution … does not work. Ten times in the last six months the silver priced has been “fixed” outside the trading range of the spot price for that day. Laughably last Thursday silver traded between 14:40 and 14.10 in the spot markets yet “fixed” at $13.85. Fridays benchmark price was little better.

The LBMA silver price is meant to represent the price at which the optimal buying and selling volumes would meet and to provide a benchmark against which thousands of trades between producers, consumers, speculators etc etc would settle. In short – the so called LBMA silver price does not come close to reflecting reality – it is vulnerable to manipulation and it is therefore effectively invalid. The key question is WHY is it failing … and why is the price administrator seemingly saying nothing and doing less.

Some will point to deficiencies and shortcomings in the platform (which fails to respond to any unusual sized orders), others will point to this being evidence of on-going price manipulation by speculators (or more likely the banks) – but the reality is rather more prosaic.

Under the old regime when a large order to buy or sell is placed in the fix (yes, old habits die hard), the price is adjusted to reflect this and it winkles out those with an opposing view – once the buying meets the selling – and the price adjusted up and down accordingly to reflect this, a fair view of the price of silver is set against which a host of contracts between parties (often not directly involved in the price setting) are settled. The LBMA Silver Price is administered by CME and Thomson Reuters who have an External Oversight Committee – who are they and where are they??? Should they not come forward and explain what is going wrong and what they are going to do about – it is their job.

The real problem as we see it is that banks are increasingly unwilling or unable to place corresponding orders because of fears of abusing a situation and facing the wrath of the regulator or their compliance departments. In short – they have become entirely emasculated. The changes to the fix brings to mind the expression “the operation was a great success but unfortunately the patient died”.

Try it – walk into any dealing room in the City of London and leave a £50 on the floor – I guarantee you it will still be there an hour later. No one would take it and no one would report it – dealers would just hurry on by.

Since Mitsui the only non-bank amongst the price setters departed, we have only banks involved in the benchmark setting process so it can only get worse.

However, to suggest that ‘animal instincts have disappeared in the City of London would be wrong – it’s just that wolves have been replaced with sheep.

Author: Ross Norman (ross.norman@sharpspixley.com), CEO of Sharps Pixley Ltd (www.SharpsPixley.com)

2 Comments

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