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. 

The journey that started with false claims that the old fixing methodology was flawed only to be replaced by an IOSCO compliant model which was technically advanced, manipulation-resistant, all engaging and transparent solution … which does not work. Ten times in the last six months the silver price has been “fixed” outside the trading range of the spot price for that day which is nonsensical. Laughably last Thursday silver traded between 14:40 and 14.10 in the spot markets yet “fixed” at $13.58. Fridays benchmark price was little better. A benchmark or reference price it is not.   
The LBMA silver price is meant to represent the price at which the optimal buying and selling volumes would be met and to provide a benchmark against which thousands of trades between producers, consumers, jewellers, industrials, speculators etc etc would settle. In short - the so called LBMA silver price does not come close to reflecting reality - and it is clearly vulnerable to manipulation - it is therefore effectively invalid. The key question is WHY is it failing … and why is the price administrator (CME & Thomson Reuters) saying nothing and doing less. 
Some will point to deficiencies and shortcomings in the platform itself (which fails to respond to any unusual sized orders), others will point to this being evidence of ongoing 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, the price is adjusted to reflect this in an auction-type process to winkle out those with an opposing view until the buying volume meets the selling volume by adjustment to the price up and down to reflect this and a ' fair value' is derived.  This is then used by a wide range of market participants in their contracts (often not directly involved in the price setting) for the settlement of their contracts. 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 after all their job. 
The real problem as we see it is that banks are increasingly unwilling or unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused 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 bring 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 - (and therefore the least regulation-bound), we have only banks remaining in the benchmark setting process so it can only get worse.
However, to suggest that ‘animal instincts have entirely disappeared in the City of London would be incorrect - its just that wolves have been replaced with sheep.   


31 Jan 2016

About the author

Ross Norman

Ross started his business career with business guru Sir Clive Sinclair of Sinclair Research in Cambridge, before joining Johnson Matthey as Gold Refining Manager (then the worlds largest gold refiners), then as a gold trader at NM Rothschild & Sons (the Chairman of the London Gold Fixing) and later Credit Suisse, where he was a Senior Dealer in physical bullion trading.

Ross has an enviable record within the London Bullion Market in forecasting the gold price over the last decade and is frequently sought by the media for commentary on the bullion markets. Ross has made frequent appearances on TV (BBC, CNBC, CBC) in newspapers (FT. Wall Street Journal) as well as in the newswires (Reuters, Bloomberg and Dow Jones).

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