A tradition that stretches back 117 years may be crumbling to the ground.
The LBMA (London Bullion Market Association) Silver Price, set by a daily meeting of five participating banks and administered by a partnership between Thomson Reuters and the Chicago Mercantile Exchange (CME), has been increasingly missing the mark on accurately representing the silver market.
Many parties have a keen interest in the silver fix price, including miners, refiners, jewelers, central banks, traders, and the financial industry in general. It is an indispensable daily benchmark for all of these industry insiders. All of the various parties who are heavily involved in the silver market use it as a fair price for settling silver contracts—i.e. doing business—so the benchmark must be fairly accurate.
Missing the Mark
Here's the problem: the silver fix hasn't been as reliable as usual lately.
Over the last 6 months or so, the LBMA silver price set by the fixing process has fallen outside of the day's actual trading range for the spot silver price no less than 10 times. Obviously, this renders the fixed price useless for everyone involved. Further, it hurts the credibility of the CME Group, Thomson Reuters, and the LBMA.
Why has this been the case? Experts have speculated it's because the five participating banks are worried about compliance issues with regulators. Because there has been so much scrutiny about whether the banks are manipulating prices, they are now hesitant to adjust their orders during the price-setting process for fear of later being fined. However, these adjustments are the nuts and bolts of how the fix is brought in line with real market forces and determined.
If these banks are unwilling to play their roles as arbitrageurs to bring buying and selling volumes into balance, then the entire fixing mechanism is broken. This view of what's getting in the way of a proper fix price is shared by Ross Norman, CEO of major gold dealer Sharps Pixley, located in the U.K. Norman suggests that fears of not complying with regulators has effectively "emasculated" the silver fix participants. Without the arbitrage mechanism, Norman says the fix is "not fit for purpose," and he blames the CME and Thomson Reuters for not stepping in.
In addition to Mr. Norman, investors have been losing faith in the silver fix due to the increasing frequency of LBMA silver prices that don't make sense, and therefore don't provide anything useful to market participants. Some precious metals traders have even resorted to using live pricing rather than the fix, which is a far riskier way of conducting wholesale business.
Even the world's largest silver producer, KGHM, has publicly complained that the LBMA needs to resolve the situation soon, especially after the price benchmark was below the silver spot price's daily trading range for two sessions in a row.
The new electronic method of conducting the price fix was introduced in 2014, when Deutsche Bank vacated its seat amid a manipulation scandal. The seat was filled by Toronto Dominion Bank, while the move also triggered the change to the CME-Thomas Reuters partnership to facilitating the silver fix.
CME and Thomson Reuters are now looking into implementing new safeguards to protect the integrity of LBMA Silver Price. Essentially, an intervention protocol could allow them to intervene before such a faulty fix price is published as the daily benchmark. They are also considering using a blind auction (only prices, rather than volumes, disclosed to participants) or using centralized clearing for these trades.
There are other things to consider, as well. The gold price fix has both an AM and PM settlement with the understanding that prices change throughout the day and across different markets—but silver is usually the more volatile of the two, so shouldn't it also get two fixes?
Ultimately, the current arrangement may merely be broken beyond repair, and simply needs to be replaced.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.