The Lid on the Silver Price is About to PopJames Cordelaine
Gold has traditionally been the front-runner precious metal for investors seeking a safe haven and protection of their other assets. By contrast, its sister metal silver has been sought out for its unique growth potential.
Silver has more industrial uses than gold, so it truly doubles as a commodity and a tangible asset. Unlike gold, which is market priced in dollars, silver is market priced in pennies. With notable exceptions, while gold’s price varies moderately in daily trading, silver fluctuates even more dramatically. Think of silver as gold on steroids.
But on January 28th silver traders were hit with a big surprise when the price set by banks in the formal “silver fix” strayed from the spot market price by eighty-two cents. The London Bullion Market Association (LBMA) silver price was set at $13.58 an ounce, in contrast to the spot price of $14.42 an ounce.
As industry website the Bullion Desk notes:
“Since this has implications for any transactions based on the benchmark, there is a danger that the credibility of the process will be damaged and that users will seek other prices against which to do business…”
For one hundred and seventeen years, the silver price was set between banks; in the beginning it was just five bankers in a smoke-filled room. Later the bankers would confer by phone. Last August the setting of silver prices moved to a CME/Thomson Reuters electronic platform under the umbrella of LBMA. However the process was still orchestrated through just five banks: HSBC, JPMorgan Chase Bank, the Bank of Nova Scotia, Toronto Dominion Bank and UBS.
Polish mining and metallurgy company KGHM, the single largest producer of silver in the world, was furious at a fix which deviated remarkably from the closing spot price on January 29; its head of market risk Grzegorz Laskowski told FastMarkets, “I think the LBMA needs to make every effort to explain why it happened and needs to help to develop a system that would help to avoid these kind of situations in the future.”
It’s anybody’s guess what actually happened. But some observers feel, since big banks have been under continual fire for currency rigging and other questionable practices, they now want to appear conservative. Perhaps they’re beginning to feel an electronic platform doesn’t put sufficient distance between them and the regulators.
But I think another force is at stake – a force, despite Mr. Laskowski’s outrage, that could temporarily impede his attempt to get to the bottom of things. Given the recent corruption in banks that have become “too big to fail,” and the current push towards virtual currency, banks don’t want to be left behind. It’s in their interest to downplay the wealth benefits of precious metals; they make their billions from interest on our paper and from our checking transactions.
In the coming cashless economy, precious metals will become the most effective way for depositors and investors to store their wealth and still remain anonymous. But while five big banks may say ho-hum to a true spot-price settlement, and the cost to traders of billions of dollars from what can be made to seem like an innocent, eighty-four-cent programming glitch, they can’t ultimately buck the trend. They can’t continue to turn their backs on spot settlements, which require an agreed-upon price. Mega-banks may be too big to fail; but they’re not big enough to keep a lid on the silver price or, for that matter, any commodity price.
Markets will ultimately prevail. Once the demand for global commodities heats up and manufacturing efforts intensify, (and all the big players who are helping keep prices low so they can stock up have bought their fill) the price of physical silver will shoot up. Would you rather buy high or buy low?
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