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London Silver Fixing To Be Scrapped; LBMA To Study Possible Alternatives

By Allen Sykora and Debbie Carlson of Kitco News
Wednesday May 14, 2014 9:10 AM

Editor's Note:Updating earlier story with reaction from analysts, traders.

(Kitco News) - The London Silver Market Fixing Limited said Wednesday it will stop administering the London silver fixing after Aug. 14.

Until then, the organization said, Deutsche Bank, HSBC and Bank of Nova Scotia will continue to administer the benchmark price-setting mechanism.

Analysts offered mixed views of the impact on the market, with some suggesting there will be a void for those institutions that want a benchmark price, while others say the significance had waned anyway as markets become more global and electronic.

“It’s disappointing to see a 117-year institution coming to an end,” said Ross Norman, CEO of Sharps Pixley. “My personal view is that it’s been conducted well….It’s not sufficient just to be good. You’ve got to be seen to be good as well.”

The news comes amid rising scrutiny of the gold fixing by market participants and regulators. Deutsche Bank previously said it would be leaving the fixings without finding a buyer for its seat as it scales back its commodities business.

Norman said he suspects any alternative to the fixing will be more transparent and technically derived. “I think that was fundamentally one of the biggest issues people had with the fix is it didn’t quite give you enough,” he said.

For both gold and silver, representatives of several banks hold conference calls to match buy and sell orders and decide on a London fixing, which is a single reference price for miners, consumers, investors and others in the gold industry.

The period from now until the end of the silver fixing in August is intended to provide market participants an opportunity to explore possible alternatives, according to the company that operates the fix.

“The good news is that gives us adequate time to come up with an alternative solution to the fix, because there are a lot of institutions that rely on a global benchmark, which is what fixes are,” Norman said. “Just to have nothing would be difficult for these institutions.”

The veteran bullion market participant said there is market chatter that several organizations are considering an alternative.  The London Bullion Market Association said Wednesday it will consider such an effort.

“As part of our role as the trade association for the London Bullion Market, the LBMA has launched a consultation in order to ensure the best way forward for a London silver daily price mechanism,” said Ruth Crowell, the LBMA chief executive. “The LBMA will work with market participants, regulators and potential administrators to ensure the London silver market continues to serve efficiently the needs of market users around the world. As part of the consultation process, the LBMA will be actively approaching market participants requesting feedback.”

Norman said many institutions want a benchmark such as the fixing rather than simply relying upon the spot price, which he described as “subjective” since bids and offers reflect what a single large participant might think is the appropriate price at a particular moment. Some institutions want to know they are getting the best price for their needs so favor a process in which many market participants take part all at once, resulting in an “objective” equilibrium benchmark.

Frank McGhee, senior managing member of Alliance Financial, said the loss of the silver fixing will leave a void.

"It’s a sad day. The problem is the silver fix was an a.m. fix only, so it was predominantly concentrated for London business,” he said. “You’ve got a fair amount of retail trade, especially in the U.S. Mint, that was priced against it. I personally always thought it would be better as a p.m. fix for U.S. clientele….But it is going to leave somewhat of a hole. To me it’s something that needs to be replaced because there is a need for neutral pricing."

However, Bill O’Neill, one of the principals with LOGIC Advisors, called the gold and silver fixes an “anachronism” that is losing much of their significance as markets become more global and trade 24 hours a day.

“The fix became little more than a figurehead benchmark, if there is such a thing,” O’Neill said. This especially became the case with the manipulation allegations surrounding this and other markets, he continued. He speculated that the gold fixing may eventually go away also.

The fixing in essence has acted as a “measuring system” for the market, he said.

“But it (end of the fixing) is not going to affect price whatsoever,” he said.

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There might be potential for the Comex division of the New York Mercantile Exchange, where gold futures trade in the U.S., to benefit, O’Neill added. McGhee said “I wouldn’t be surprised if some of the U.S. pricing goes that route” but he also expressed doubt that London market participants would want to accept a New York trading mechanism.

“Comex is fundamentally the smaller market versus London; you’re never going to get London to adopt that,” McGhee said. “You will have a void here in that will not serve the industry well in the guise of correcting a perceived regulatory (failing).

"I think people are seeing things that don’t truly occur. If you want to make the fixing more transparent, you can make it a viewable Web-based process, if that’s the concern. Over 20 years of trading on the fix, there are good fixes, there are bad fixes. At the end of the day it all evens out. It still, for what it was, you’re still bringing the five biggest market participants (in gold) together to come to a price. Now is it an anachronism? Probably, but it’s one that’s thoroughly embedded in the industry."

Now, there is a “vacuum” in the market, he added.

“To me it’s a real problem, whenever you’ve had a benchmark that’s been used for so long people get used to it."

By Allen Sykora and Debbie Carlson of Kitco News; asykora@kitco.com and dcarlson@kitco.com

By Allen Sykora and Debbie Carlson of Kitco News; asykora@kitco.com and  dcarlson@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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