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New London silver fix needs fixing

Amid complaints that the previous London silver fix mechanism was flawed, a new IOSCO-compliant system was implemented in April 2015. The claim was that the new process would be technically driven, manipulation-resistant, comprehensive, and transparent.

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Now, 10 months later, it is obvious that the new model has failed. On Jan. 28, for the 10th time, the London silver fix (now called a “benchmark”) came out with a price that was outside of the range of commodity markets elsewhere that were open and trading at the time – especially the COMEX in New York.

The latest failure was the most extreme. London market silver contracts that traded on the fix changed hands at $13.58 per ounce. As this happened, the COMEX contracts were trading at $14.42 per ounce. The lowest prices at which silver traded in any other of the world’s silver markets that same day was just under $14.

Supposedly, there were very large sell orders placed to change hands in the London market that day. It took 16 iterations over 29 minutes of the on-line auction process among the market makers to finally balance buy and sell orders at that price.

Although further investigations are almost sure to take place, it appears that the banks involved in fixing the silver spot price are so concerned about problems with regulators and overseers of this market that they are not that willing to step up to be real market makers. Because of this, expect continuing problems with the London silver price falling outside of concurrent global trading prices.

KGMJ is one of the world’s largest copper mining operations. As a by-product, its main mine located in Poland is also the world’s largest silver mine producer. On Feb. 1, Grzegorz Laskowski, the company’s head of market risk, complained in an interview, “The large discrepancy between the spot price and the fix is very alarming to us especially that it happened twice in a row.”

I am not familiar with all the intricacies and regulations of trading in the London market, but I have some ideas how its price fixing process could become more attuned to the global silver price in effect at the time the fix is determined.

  • If the fix price looks to fall more than 1 percent outside the range at which silver is trading elsewhere in the world, especially at the New York COMEX, allow authorized traders in other commodity exchanges to be able to buy or sell at the London fix. Perhaps they could be charged a small fee (5-10 cents per ounce?) that would more than cover the cost of moving physical silver to or from London.
  • Establish a limit beyond which prices could not rise or fall more than a certain percentage from the current prevailing prices elsewhere. On Jan. 28, the silver fix came in 6 percent lower than the concurrent COMEX price. A discrepancy of this size would lead to closure of many financial markets. I don’t know what limit would make sense, but certainly it would be smaller than the discrepancy on Jan. 28.
  • The fix companies currently setting the London silver fix price are all banks. Even if they are all supposedly “market makers” for silver, they are not acting like it. How about expanding the number of participants and include some mining companies and major users so as to reduce the prospect of an outside price jump or fall.

These are just some quick ideas, not in polished form. I’m sure that a study of successful market making mechanisms in various commodities could bring up refinements for these and some totally new concepts.

After the fiasco on Jan. 28, the London market is bound to lose business unless it does something to fix the “fix.”

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects.

This article was originally printed in Numismatic News.
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