Last week, an investor who claims silver prices were manipulated by the London Silver Fix filed a lawsuit against Deutsche Bank, Bank of Nova Scotia, and HSBC in a New York district court.
The London Silver Market Fixing Ltd. has existed for over a century and sets a silver price benchmark daily. The participating banks have a conference call and then announce the silver price, which is used as a benchmark by many institutions around the world.
But Deutsche Bank recently announced it will withdraw its participation in the silver fix. With this announcement, the current silver fix system as we know it is going to end on August 14, which is just a couple of weeks away.
Does anyone see the irony in this lawsuit? The London Silver Fix is being sued for fixing silver prices. It will be hard to claim investors were misled in any way, considering the name itself is an advertisement for the accusations.
As I've mentioned before, we should not be under any illusion that this is a free market setup. We know the parties involved are connected to the government, and we know governments around the world are heavily involved in the financial markets and the major financial institutions.
The Silver Price
In several articles I have read on this subject, it seems there is a common theme of assuming the London Silver Fix determines the price of silver.
I think it is important to be accurate here: the London Silver Fix only sets a benchmark.
The price of silver is determined the same way the price of any good or service is determined in a free market: it is based on supply and demand, buyers and sellers.
While I still maintain that the silver fix is not exactly an action of the free market, it is dependent upon pricing in the marketplace. If a million people wake up tomorrow morning and decide they should buy some silver, then the price for silver is going to be bid up quickly. Again, it is an issue of supply and demand.
At that point, it doesn’t really matter what the London Silver Fix group does. If silver is trading for $25 an ounce, they aren’t going to get away with pricing it at $20 an ounce.
But I must stress this point because there are a lot of accusations out there about manipulation. There may be manipulation to some extent, but this is limited in the long run by buyers and sellers. In the long run, the price will be determined by the supply and demand for silver.
The one area where there is major manipulation that will have long-term impacts on the price of silver (and everything else) is the devaluation of the money. As the Federal Reserve, or any other central bank, continues to create new money out of thin air, this will drive up the silver price in nominal terms.
It is still an issue of supply and demand, but in this case, we are dealing with the other side of the transaction — money. A higher supply and lower demand for the U.S. dollar will lead to higher nominal prices in silver as well as everything else.
A Global Marketplace
I can understand the need for the London Silver Fix as it came into existence in the late 19th century. The world was different back then — it was big. While the telegraph had already been invented, it still took time for news to travel. That means it also took time for prices to travel.
Because of this, there could have been large price differentials between different places, especially across oceans. The price of silver in Chicago might differ from the price in London. A silver price benchmark would certainly be helpful in this regard.
In today’s world, however, information is global and almost instantaneous. You can go to various websites to find out the current price of silver or most other stocks and commodities.
As an investor, I don't see why I need the London Silver Fix to give me a price in our world today. I can go on the web or turn on CNBC, where a ticker on the top of the screen will tell me the silver price.
There is ultimately no need for a silver fix in today’s world. We have thousands of buyers and sellers determining the price every minute of the day, and the price is constantly changing, so it seems ridiculous to rely on some conference call that takes place once a day.
Keep in mind, however, that the changing price relays the latest information of where a buyer and seller met, always reflecting the past. It doesn’t guarantee the price for which you will be able to buy and sell. For this, you must watch the bid and ask prices.
August 15, 2014
With the withdrawal of Deutsche Bank from the London Silver Fix, the organization is breaking apart.
August 14 will be the last day of the silver fix. Some are speculating that the price of silver will jump on August 15. If the silver fix was really fixing the price (which still sounds ridiculous), then maybe prices will adjust accordingly once the manipulators are out of the picture.
I doubt this will happen, although you never know if there will simply be a jump as a self-fulfilling prophecy. If enough people believe a price jump will occur, then maybe the price will jump higher even if there was little to no manipulation before.
Of course, you could also argue that if that were the case, then investors should already be anticipating a jump in prices and would already have started buying, thus moving the prices higher now.
As I said before, I don’t think the silver fix can really manipulate prices to much of an extent. Therefore, I think a big jump in the silver price on August 15 is unlikely. But in these markets, you never do know.
There are, however, other good reasons to buy and own silver. As I mentioned earlier, the price of silver will go higher as dollars become more plentiful. As the U.S. dollar depreciates in value, you will want to own things that do well in times of inflation.
Not only will silver go up in nominal terms, but it is quite likely that it will go up in real terms, too, meaning the price will go higher even when adjusting for inflation.
We have seen stock bubbles and real estate bubbles. We may have another stock bubble now, and we also probably have a bond bubble. It would not surprise me to see a precious metals bubble sometime in the future as well.
Silver is riskier and far more volatile than gold. But if precious metals go on another bull run, I expect silver to really pay off.
Forget the price fixing and just buy what you can now. If the price is being manipulated at all, then it should make it that much more of a buying opportunity.
Until next time,
Geoffrey Pike for Wealth Daily