Investing in Silver Manipulation

Written By Geoffrey Pike

Posted July 4, 2014

Precious metal fans may be interested to know that seven organizations are competing to run the global silver benchmark.

The benchmark is currently run, as it has been for the last 117 years, by three banks that meet daily via conference to compare their orders for silver.

At a recent conference held by the London Bullion Market Association (LBMA), companies put forth proposed solutions to various participants who will choose a winner. This included observers from the Financial Conduct Authority, who will also have a voice in choosing the next successor.

For those who aren’t familiar with this practice, it is known as the London silver fix. It also occurs with gold.

To sum it up, the London Silver Fixing Company sets the silver price once daily at 12:00, and this is used as an international benchmark for pricing a variety of silver products.

Not a Free Market

One thing that is important to note here is that this is not completely a free market phenomenon. First, the London Bullion Market Association is, as Wikipedia puts it, “loosely overseen by the Bank of England.”

While some people like to point out that central banks are independent entities of the government, we all know they are a political creation.

I’ve heard people say the Federal Reserve is a private organization. If that is the case, it has been granted some very special political powers in the form of holding a monopoly over the legal tender. It is also unique among private organizations in that the chairman is nominated by the president and approved by the Senate.

The Bank of England is no less political, and its oversight over the LBMA is the first indication of political involvement.

Second, the Financial Conduct Authority, also sometimes referred to as “private,” is a regulatory body in England and has regulatory power over financial firms. Again, this is not an organization that exists as part of a free market structure.

This isn’t to say the silver benchmarking process is all political. We can be sure it involves using data from free market transactions.

But we can also be sure there is a political angle to this whole thing.

Buyers and Sellers

A lot of people aren’t aware that there is a small group of people who set the silver price. It can be a bit confusing at first.

Of course, it really isn’t these three banks that determine the price of silver. And the successor of running the silver fix won’t be determining the price, either — at least not in a broad sense. This is just for daily pricing for certain international transactions.

The real price of silver is determined every day by buyers and sellers. In fact, it is not just daily, but virtually every minute or second. It is the actions (or inactions) of buyers and sellers everywhere.

The real price of silver, as with anything else, is where buyers and sellers meet in the middle. You could say the price is based on the last transaction that was made, but even this isn’t technically true. The price is constantly changing.

Instead of looking at the last transaction, it is even more appropriate to look at the “bid” and “ask” prices. Your price depends on if you are a buyer or a seller.

The Futures Market

The futures market is often used in pricing silver, as well as a lot of different commodities. It serves an important market function as part of the price discovery process.

While there are winners and losers in the futures market, it generally benefits the market economy in more accurately reflecting prices and trying to predict the future. If the future price of silver is showing it to be high, this is a signal to suppliers to spend more on mining silver. It is also a signal to silver consumers to consume less and save more. This is the same with any precious metal or commodity.

The futures market can even serve a purpose to those who lose. Some people may use the futures market as something of an insurance policy.

For example, a silver mining company might be willing to sell some of its silver in the future at a pre-determined price in order to lock it in. It may forfeit big gains, but it will also protect itself from big losses.

Or an airline company might participate in the futures market in oil in order to protect itself against high oil prices in the future. Futures and options trading can provide this benefit.

With gold and silver in particular, there are often accusations of price manipulation by The Powers That Be. There could be some truth to this, especially in regards to central banking. I suppose it really is true in regards to the silver and gold fix that goes on daily in London.

If anything, this might affect the futures market in the short term.

Owning Physical Silver

While short-term manipulation is always possible, it is important to remember that it is the physical metal that ultimately determines the price. Even if the futures market is being manipulated, it cannot ultimately overcome the price of the actual metal.

If enough people wake up tomorrow morning and decide they want to own some physical silver, then the price will quickly reflect this. As each person calls up a coin dealer or walks into a coin shop, they are going to bid up the price of silver.

The coin dealers are going to charge a higher price as the supply of silver diminishes. Maybe some dealers have a policy of using the spot price plus some kind of premium, but that won’t do any good if they run out of coins to sell.

You can even buy and sell coins on eBay now. If more and more people want to own physical silver, then you will see the prices of silver coins going up on eBay. The dealers will be forced to raise the price. When their “sell” price goes up, their “buy” price is likely to follow.

The point here is that the supply and demand of silver is what is ultimately going to determine its prices (along with the supply and demand of the money being used to price it). The futures market must ultimately reflect this. And if the London silver fix doesn’t ultimately reflect this, it will lose legitimacy.

So while the London silver fix really may be a “fix,” its appropriate name is not going to control the silver market.

Silver is considered the poor man’s gold. As men get poorer from the Fed’s destructive monetary policy, they will be looking to protect themselves from a declining dollar. Silver will be all that some people can afford at that point.

While silver is riskier and more volatile than gold, it may end up being the most rewarding of the precious metals as the dollar continues its descent.

I think investors would be wise to ignore the next organization that fixes the silver price in London and instead consider diversifying with some silver investments. The fix won’t be in for long.

Until next time,

Geoffrey Pike for Wealth Daily

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