Fear of regulation may impede bank’s from manipulating London’s silver benchmark

• New regulations in 2018 have spooked bullion banks and silver fix operators
• Lack of liquidity in silver fix auction has lead to high volatility in the market
• Silver benchmark has strayed from spot price multiple times since 2016
• No new silver benchmark operator lined up to take over in the Autumn
• No smoke without fire as actions point to silver price manipulation
• Silver remains suppressed and at a low price for investors stocking up

Gold fixing in London at NM Rothschild and Sons began in September 1919

Simple economics tells us that markets and prices are driven by demand and supply. Unfortunately, this isn’t always the case in the silver market. However, the threat of new regulations may be putting a stop to some bullion banks from fiddling the London silver benchmark.

Silver price manipulation is always a thorny issue and one that has been taken on by academics, lawsuits, by veteran silver analyst Ted Butler and by the Gold Anti-Trust Action Committee (GATA). As we have reported previously, allegations of silver price manipulation are far past the point of rumours, in the last couple of years bullion banks have been called to account for their behaviour. Deutsche bank even agreed to settle out of court and pay $38m, in response to a class-action lawsuit.

But it seems the rising attention (and cost) of manipulation by silver bullion banks is not the only thing that is putting a stop to a behaviour that has been evident for over a decade. Reuters reported yesterday that fear of being accused by regulators of market manipulation has resulted in participating banks being reluctant to add liquidity during the daily auction.

Banks finally fear regulation

The low volume of orders and lack of liquidity has resulted in the benchmark price failing on multiple occasions to provide a fair and accurate snapshot of what is known as the ‘spot price’. The spot price is calculated based on a much wider and faster market. Huge divergences from this spot price have resulted in unexpected gains and losses, according to Thomson Reuters data, since at least January 2016.

Traditionally, the seven banks involved in the auction ensure the benchmark stays close to the spot price by adding liquidity and buying or selling silver during the auction. However, lawsuits regarding gold and silver manipulation as well as investigations into other markets such as Libor appear to have put the banks off from their usual antics for fear of drawing the attention of regulators.

Sources told Reuters that the ‘Banks are now unwilling to intervene beyond putting in orders beforehand, fearing this might be construed as price manipulation by regulators.’

As a result, unpredictable fluctuations in the silver benchmark price have plagued the market:

‘Between January 2016 and March this year volumes have risen as high as 12.9 million ounces and fallen as low as 200,000 ounces, while on seven occasions the benchmark has diverged from the underlying spot price by 10 cents or more. It has diverged by more than 5 cents on more than two dozen occasions, including five times in late March alone. This is highly unusual as the average divergence for the electronic auction is about 1 cent.’

The banks’ lack of action in the markets has reduced confidence in the market, reducing activity and increasing volatility. Evidence perhaps that the seven participating banks don’t know how to play nice and run an efficient market, when the regulators are in the shadows.

New tools please

It is not just the banks who are spooked by the regulators. The recent volatility has further complicated matters that were already threatening the future of the silver fix. Early last month the London Bullion Market Association (LBMA) announced that CME Group and Thomson-Reuters would no longer be the platform facilitators for the London Benchmark, despite both having two years left in their contracts.

The two companies stated that new regulations were the reason for their reviewing of their participation in the London Silver market, but no further explanation was given. There have been some suggestions that both CME Group and Thomson-Reuters left because they could see that the jig was up and the benchmark would no longer be able to operate in the way it has for so many years.

The fluctuations in the price and lack of liquidity has meant the LBMA is struggling to find a new operator, reports Reuters. The organisation is hoping that a new operator will shine a light on how the auction can continue. Whether they can do so with new regulation and banks finding it difficult to act honorably, is a question that remains to be answered.

New regulations on the horizon

Why are the banks and operators suddenly nervous about regulation? One would have thought that post-Libor and the financial crisis that they would have become wary. In truth they have been increasingly so over the last couple of years.

The push for more regulation has been going on since 2013 when a draft regulation was put forward “on indices used as benchmarks in financial instruments and financial contracts”. The final regulation was approved last April. The fact that the regulation specifically mentions benchmarks is pertinent.

On 1 January 2018 new regulations from the European Union will come into force. The regulations will make it harder for banks and platforms to manipulate financial markets such as Libor, Forex and obviously precious metals.

As we mentioned in the introduction, banks have purportedly manipulated the benchmark rather than allow precious metal markets to set the price through market forces. This has meant that price discovery has been hard to come by, leaving buyers and sellers as price takers. However price manipulation has been dismissed by the bureaucrats for many years. This has been going on under regulators’ noses, but increasing awareness by the legal system has meant it can no longer be ignored.

No smoke without fire

Whilst some academic research has concluded that evidence of gold and silver price manipulation is ‘at best suggestive’, events in recent years have led many to ask if there would be so much smoke without fire? After all, we have seen evidence that the majority of markets are rigged. See LIBOR and forex for recent examples, not to mention QE which amounts to the same thing.

Even in this very market, silver and gold, we have had plenty of smoke and arguably sparks. As we mentioned in the introduction, last year Deutsche Bank was named the lead defendant in a case that stated they had ‘illegally conspired with Bank of Nova Scotia and HSBC Holdings Plc to fix silver prices at the expense of investors’. The German Bank agreed to settle out of court and made a deal both financial and in terms of offering information.

In the letter detailing the deal, Deutsche Bank were happy to hang their contemporaries (including UBS AG Barclays Plc, BNP Paribas SA, Standard Chartered Plc, Bank of America Corp and HSBC) out to dry:

“Deutsche Bank has also agreed to provide cooperation to plaintiffs, including the production of instant messages, and other electronic communications, as part of the settlement. In Plaintiff’s estimation, the cooperation to be provided by Deutsche Bank will substantially assist Plaintiffs in the prosecution of their claims against the non-settling defendants.”

This provision of ‘smoking gun’ evidence opens the door for further cases to be brought against the multiple banks involved in the bullion markets, this combined with new regulation is perhaps prompting banks to get their ducks in order.

The lack of liquidity and volatility in the London Silver Market shows that those banks involved are aware of what the future should hold both in terms of lawsuits and regulatory investigations. What this means for the future of the silver benchmark, time will tell.

Conclusion

Price manipulation, whether of precious metals, interest rates or forex is not a victimless crime. There are thousands of companies and individual investors who have seen losses on their investments, some as a direct result of this manipulation.

Ironically for those looking to manipulate the price, this behavior is actually an opportunity for those who are keen to stock up on both gold and silver. With a suppressed price, investors can take the opportunity to accumulate more bullion.

The desire to hold more bullion will continue to grow as 2017 presses on. Since the beginning of the year it has perhaps felt as though every morning we have woken up to unsettling news from somewhere in the geopolitical sphere. Whether it’s North Korea, European elections, Syrian bombs or home-grown terrorists, it is as though unsettled uncertainty is all around. For this reason, we expect to see a growing in interest in holding precious metals and investors dedicating more of their portfolio to them.

What about the manipulated prices? Will they continue? We don’t know, but as we explained last year, artificially surpassing the pricing mechanism is akin to forcing a beach ball under water, it can only pop back up and often with great force.

“The further a beach ball is pushed under water in a pool – the higher it ultimately jumps out of the water. This creates a great opportunity for investors to accumulate precious metals at prices which will be viewed as very cheap indeed in the coming years.”