What’s in a name? It’s unfortunate, to put it mildly, that London’s global benchmarks for precious metals pricing are called “fixes”.
“Fix” is a word with 25 different meanings, according to the Collins online dictionary, including, at number ten, “to influence (a person, outcome of a contest, etc) unfairly”. And, as far as the many conspiracy theorists populating the fringes of the gold and silver markets are concerned, that’s about right.
After all, conspiracy theorists would say, what else would you call a small group of bankers locking themselves in a smoke-filled room a couple of times a day only to emerge a few minutes later and tell the world what the price of gold and silver will be that day? Think top hats, and fat cigars. And little flags, although no one’s quite sure what the little flag thing is really about. Something Masonic probably.
It’s amazing that they’ve been able to get away with it so long! But at long last, it looks as if the whole “fix” will be thrown into the dustbin of history, starting with silver.
It is, to quote just one of a host of online commentators, “the beginning of the end of precious metals manipulation”. It’s just a shame that none of it is actually true.
No top hats. No cigars. Not even a room for the bankers to engage in their dastardly manipulation.
The fixes, used to establish daily or twice-daily snapshots of the markets for gold, silver, platinum and palladium, are now conducted by teleconference. They are open in every sense of the word.
Rather than being determined by a small number of self-interested banks, they reflect the concentration of physical order flows from producers, consumers and even, in the case of gold, central bankers.
Interested parties can and often do listen in to the proceedings. Buyers and sellers can change or pull their orders at any stage. The process, correctly termed a “Walrasian auction”, may be archaic but it is rooted in physical reality.
They are “fixes” in the third sense listed by Collins dictionary; “to settle definitely”.
Compare and contrast with Libor. It was the systemic manipulation of the world’s key interest rate benchmark that turned regulators’ attention the world over to how other market pricing benchmarks are established.
A contributor to the Libor “fix” (definition No. 10) had to submit rates not based on any actual transaction but rather on the rate it thought it would be able to borrow funds at, “were you to do so by asking for and then accepting interbank offers in a reasonable market size just before 11am.”
Libor was an abstract construct of collective expectation. Or, more simply put, it was an accident waiting to happen.
None of which will convince the conspiracy theorists that the fixes aren’t fixed (definition No. 10). But then neither did an exhaustive, five-year investigation of the silver market by US regulator, the Commodity Futures Trading Commission (CFTC), which after 7,000 staff hours found no evidence of manipulation.
And that perception is what has really undone the silver fix and may yet bring down the others. The departure of Deutsche Bank from both the gold and the silver fixes, announced in January, did not automatically mean the demise of either.
Rather, it was Deutsche’s inability to find a buyer for its seats that triggered the current crisis, since the number of participants in the silver fix would have dropped to just two, Scotiabank and HSBC.
But then who would want to pick up a chalice poisoned by the accumulation of lawsuits in the US alleging manipulation of the gold market? There is no reason to believe any of them will be any more successful than the legal claims against JPMorgan and HSBC for silver price manipulation, dismissed in March 2013.
But for the investment banks that tend to dominate the wholesale precious metals markets, many of them already reeling from huge fines for financial malfeasance, the legal and reputational implications of being involved in the fixes are simply too dire.
Which is why the number of silver fixers was set to drop to two and why the number of gold fixers has already dwindled to four. Indeed, there may be further attrition in the latter, given the flagged (no, not that sort of flag) withdrawal of Barclays from the whole business of investment banking.
There may be no right number for how many participate in the fixes but quite evidently two is pushing it.
The whole London bullion market structure is now in a fix (definition No. 22, meaning “a predicament or dilemma”). But it must also take much of the blame. It seems extraordinary that no one seems to have seen this coming.
The London Bullion Market Association (LBMA), the umbrella under which the fixing companies operate, has just launched a survey on what should be done when the silver fix bites the dust on August 14. The aim, it said, is “to gather the views of the global market to find a solution which meets the needs of market users around the world”.
Which seems to be leaving it a bit late. Mightn’t this sort of consultation exercise have been conducted a little earlier, given the known regulatory scrutiny of price setting across the financial spectrum? The lack of foresight and pre-emptive action reflects the historically loose structure of the London market.
The clue is in the LBMA’s name. Who is the leader in an “association”? The London bullion market’s core functioning is fractured, split between individual fixing companies, and the LBMA, which is responsible for maintaining the physical good delivery list and disseminating forward prices. The platinum and palladium market exists in its own adjacent space.
Regulation has historically been a patchwork of dotted lines and grey spaces between the Bank of England and financial regulator the Financial Conduct Authority.
Lacking clear leadership, the London bullion market has now largely gone to ground, a collective reaction that will do nothing to dissuade its detractors from the rightness of their cause.
So what is to be done? The silver fix in its current form will go. Can the others be saved? Should they be saved? No regulator has yet come out and said it disagrees in principle with the nature of the fixing process.
Simply dumping the fixes and switching to a futures market close as a reference price means losing the physical transaction flow that underpins the benchmarks or pushing that flow further into the shadows of over-the-counter trade.
But it is clear that the LBMA and the fixing companies need to do far more to enhance the transparency of the process. Even basic information such as how much volume is transacted in any one fixing session has been lacking.
The best outcome would be to combine historical practice with 21st century technology, physical order flow with IT infrastructure. If the current structure of the London bullion market can’t accommodate such an evolution, then it too must change.
What won’t change is the views of those who have indirectly fixed (definition No. 15, meaning “to spay or castrate”) the silver fix. For them the silver and gold markets will always be fixed, whatever the price-setting mechanism.
Oh, and one last thing. Whatever new mechanism does emerge, it might be an idea to change the name to something a little less, well, ambiguous.