The End (of the Silver Fix) Is Nigh

May 15, 2014

For a long time, many in the gold and silver communities have been say that the prices of the monetary metals are manipulated. Recently, one particular allegation came to prominence because it was asserted by the German regulator BaFin. This allegation is that the members of the London Fixes for gold and silver are using their position to manipulate the price. This would seem to be confirmation of widely held longstanding belief that the markets are rigged, the long-sought smoking gun.

Not so fast.

If you dig through the numerous articles that have been published on this topic, you get a slightly more nuanced picture. The allegation is not that the banks who run the Fix are keeping the price suppressed. The allegation is rather less earth shattering. They are allegedly front-running their clients. Skimming money from client order flow may or may not be illegal in London. I don’t know. It may be unethical, but that’s not my point today.

Skimming is not the same as suppressing the price.

Let’s take a step back. What is the “Fix”? Some suggest that the very name means that there is something crooked, that nefarious forces are rigging the game. That’s just a misunderstanding. The Fix is an institution born in an earlier era, before the Internet and even before the telephone was widely used. The Fix is when the big brokers sit down and find the price at which the largest volume of metal will clear. How do they know how much volume will clear at any given price? They all look at their own order books.

Back in 1897 when it began, the silver Fix certainly made the bid-ask spread narrower. This is to say it made silver more liquid, and, as a result, costs were lower for those who produced or consumed the metal.

Perhaps, today the Fix does not narrow the spread. It may be like High Frequency Trading. HFT claims to narrow the spread, but I recently wrote an article discussing how HFT may be nothing more than profiteering on regulations that distort the market beyond recognition.

However, I doubt this is true for the silver Fix.

Those who want to buy shares of Apple have to do it on the NASDAQ. NASDAQ has to comply with all of the regulations, including Regulation National Market System. The regulators have the exchange, and all traders of all shares listed on the exchange, by the throat.

No such chokehold exists in silver. Therefore, if silver miners, bullion dealers, or other firms are choosing to do business with the banks that run the Fix, there must be an advantage to them. If the members of the Fix are providing an advantage, then they are adding value and thereby earning the profit they make.

In any case, it’s history. The silver Fix will be ended in August, after 117 years.

The silver community is excited. Many believe that the Fix is part of the apparatus that is suppressing the silver price. Without suppression, the price will shoot up to $100 or $250 or whatever number. Dismantling this very visible operation of the silver suppression cartel is a step on the road towards $100.


I write about the silver price and silver market conditions every week, so I don’t want to get distracted with that discussion here. Instead, I want to make another prediction.

If the silver Fix is adding liquidity to the market, as I believe, then when it disappears the bid-ask spread will widen. The silver price will become more volatile, as will the silver basis.

Higher volatility is a boon to one group of people. Traders, especially the ones who are nimble to change positions quickly, and clever enough to understand the shifts that drive the price moves, stand to make a fortune. For everyone else, volatility is all downside.

There is little on this earth more frustrating to make a decision to buy, and then in the time until your order is executed, the price goes up 5%. So you have to pay 5% more. The one thing that’s even more frustrating is watching the price drop by 6% the next day.

Do you have investments in any silver mining companies? To them, wider bid-ask spreads mean greater frictional costs. It will cut into their profit margins.

When you go to your local coin shop, you will pay more when you buy and you will get less when you sell.

As in a mechanical system, if friction increases then motion decreases. Some parts may seize up altogether.

In recent years, pressure from regulators and litigation has pushed a number of companies out of the commodities business. The latest victim of this trend is the silver Fix. It’s ironic that some of the people who push for this say they want free markets.

It is not a free market when the government pushes company after company out of business, picking winners and (mostly) losers. It is not a free market when everyone can benefit from the provision of a service, but it becomes impossible to provide, so people are forced to incur higher costs or do without products.

It’s one or another flavor of socialism.

Socialists insist that government can deliver better outcomes than the free market. Not once have this ever turned out to be true. What government interference causes is a collapse in coordination between people in the economy.

The bid-ask spread is an obstacle to doing business. The narrower the spread, the more people can satisfy their need to buy or sell. The wider it is, the more people are blocked by the higher cost.

The end of the silver Fix may or may not push up the price of silver. Either way, it will have unintended consequences.

© 2014 Monetary Metals

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.

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