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The End (of the Silver Fix) Is Nigh

Monetary Metals's picture




 

by Keith Weiner

 

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.

Maybe.

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.

 

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Thu, 05/15/2014 - 17:02 | 4764053 Bastiat
Bastiat's picture

End of the "fix" is not the nd of the rigging.

Thu, 05/15/2014 - 15:57 | 4763803 SAT 800
SAT 800's picture

It's a good article. The posts on the page are truly remarkable. It must be horrible to have a "normal" IQ; and a "normal" education; it's amazing some of you people can understand how to tie your shoes.

Thu, 05/15/2014 - 16:28 | 4763943 realWhiteNight123129
realWhiteNight123129's picture

Ok let us destroy politely the argument of fixing. The fixing in 1919 was necessary because the amount of Sterling and even USD were completely unbacked by Gold, mainland Europe was horrible in terms of absence of backing of the currency. In 1917 there was an embargo of Gold that meant that Gold could not be exported. It was said in the press that it was "unpatriotic" Gold and that Gold should be impounded in the Central. The redeemability feature of the currency (true Gold standard not to be confused with the Gold exchange standard which was doubling counting USD and GBP after Genoa convention of 1921). So the fixing was necessary to keep up appereance on the GBP that is for the fixing of 1919.

Ok as far as manipulation, there has been the following: Gold was banned from use during the mandat period of hyperinflation in France. In 1810, as Britain had issued with the war, Britain forced people to accept paper "as good as gold" while people were refusing to get the inconvertible pound. (Between 1797 and 1821) the convertibility was suspended.

The demonetization of Silver started in 1870 with the German victory over the French and followed in the US in 1873. Great Britain´s Gold standard was inferior to bimetallism and Silver was almost de facto demonitized at the early of XIX century. The demonetization of Silver had the impact of overvaluing Gold in the West and rendering the Pound stronger than it should be, along with consideration of mid-century discovery of Gold. The inflation was exported to India and China through Silver demonitization. Mexico followed in 1905. So the demonetization of Silver was really the first attempt to "control" the market. The end of effective redeemability since 1917 in US another and the Gold fix a third. 

There are plenty of author talking about this political move on Silver, it is a very hot topic of the late XIX I suggest Mr. Weiner starts by giving his informed views on the topic.

Thu, 05/15/2014 - 15:54 | 4763782 realWhiteNight123129
realWhiteNight123129's picture

What volatility? I am looking at the Silver it really does not move at all. I keep staring at it, it is there doing nothing not moving. inanimate, if I look long enough, there might some oxidation ok, but for my Gold I see absolutely no change.... 

PROBLEM:

Silver ratio to calf in drachma 0.75 ounce according to Polybius, Silver ratio to calf in 1870 was 2. Silver ratio to Calf today about 7. Compute calf "inflation" in Silver over 2,300 years?

ANSWER: 9.5 bips of inflation per year (but that is no inflation, it is just because it is demonetized) 

ok move on. Nothing to see here.

 

 

 

Thu, 05/15/2014 - 15:02 | 4763600 Death By Cold S...
Death By Cold Steel Report's picture

Okay before the silver crash I will relieve all the little people of this unforseen consiquence to come....

 

Please kindly Sell me your Silver for $4.00 an ounce. I have 10K set aside to help relieve you of the burden of all your silver coins. Come one Come all to the table of enlightment....

Thu, 05/15/2014 - 12:39 | 4763018 takla
takla's picture

dudes got no more insite on the outcome than the next shill,another waste of bandwidth

Thu, 05/15/2014 - 12:22 | 4762938 assistedliving
assistedliving's picture

unintended consequences.  just brilliant

kinda agree w/ the sentiment here...thinking of the axe murderer plea bargaining down to jaywalking

Thu, 05/15/2014 - 12:05 | 4762846 Bemused Observer
Bemused Observer's picture

Silver...heck, I like silver almost as much as I like gold! And like gold, I buy my silver on the 'black market' of yard sales/estate sales.

But unlike gold, silver has many household uses. Flatware, dishes, serving pieces, etc. So, you can use it while you are "investing". And if you have nice pieces, like my Gorham Fontainbleau flatware, there is also a 'premium' just for the artistic qualities.

And silver is even easier to find at the sales than gold. It's EVERYWHERE! I have enough sterling flatware to open a chain of bed and breakfasts...And these days I'm also running across larger pieces of antique sterling, as the price is low and flks don't think it's worth much.

And no one is keeping track of my purchases, unlike those official investment vehicles. Boullion and coins? Coins are for collectors and boullion is for sipping hot from a mug. Stirred of course with an antique sterling demitasse spoon...

Thu, 05/15/2014 - 11:58 | 4762820 Conax
Conax's picture

I'll condense the article:

You think you won this time but you won nothing!

We will make tons of money off the daily volatility without the blessings of the fix.

You'll all be vewy, vewy sowwy! 

Silver nearly touched 20 this morning so a 3 alarm shorting hose was turned on it.  That hose will still be there, so Poindexter here can make his volatility threats.

Sucko article, written to discourage, like most silver stories.

Thu, 05/15/2014 - 11:49 | 4762780 BeetleBailey
BeetleBailey's picture

The Hunt brothers around....those fat fucks.....

I wanna see them monkey-hammer the spot ...oh..for about ...another year....exhaust themselves...

Then some oilgarch cocksucker will go long and swamp them fuckers.....

Love the action....

BUT I'M JUST-A STACKIN!!!!!!

Thu, 05/15/2014 - 11:15 | 4762676 JailBanksters
JailBanksters's picture

Bullplop, It's just the Usual suspects giving up being caught with their pants down.

Somebody else will take over the much coveted job of Manipulating Prices. It won't be allowed to roam free, and don't you worry about that.

 

Thu, 05/15/2014 - 10:01 | 4762372 no bones
no bones's picture

 

Watch Wiener weasel out of his longstanding basis analysis "debunking" of silver manipulation.  

Thu, 05/15/2014 - 09:56 | 4762345 Fred123
Fred123's picture

Again?

Thu, 05/15/2014 - 09:42 | 4762275 unwashedmass
unwashedmass's picture

 

you know this all works until it doesn't.....and Putin is probably gonna be the one to pull the plug. 

Thu, 05/15/2014 - 09:39 | 4762250 bardot63
bardot63's picture

Not sure what to make of author Keith Weiner's premise here.  He doesn't differentiate between a fix of paper silver which affects a market of physical silver.  He doesn't tackle bullion bank JPLewinsky's role in pushing naked shorts, and he doesn't account for declining production from damaged silver mines thanks to mis-matched production/retail costs. He's probably been studying silver longer than I, but at least I know why silver is underpriced and undervalued. It is due to more paper supply than physical demand which is a criminal farce and has nothing to do with true markets.  Without a silver fix from the bullion lewinskys, I can only see silver migrating to where it is best treated.  Whatever the outcome, it's bound to be better and more honest than what we have now. 

Thu, 05/15/2014 - 09:37 | 4762247 Save_America1st
Save_America1st's picture

You're talking paper derivitive bullshit though.  I'm sure that's the primary mechanism which is used to screw with the prices rather than the daily "fix".  But this still shows that times are changing and "fixing" prices either in this manner or by naked shorting markets with unlimited paper garbage is on it's way out much sooner rather than later.

The Crimex can't continue on as it is.  And I'm sure all those on the inside know it and are preparing quickly to extricate themselves from it before the SHTF. 

The big dogs won't lose money.  They're not done stealing every last dime they can from the rest of us.  And once they know the tide is ready to shift they will be able to do so very easily and still make money off all their hoarded metals when the world shifts back to a more sound monetary policy less based on fiat and based more on the backing of gold and/or silver.

Stackers just need to continue to stay patient, stack when the stackin's good such as right F'ing now, and always BTFD whenever possible. 

I'd like to hear more about this in the weeks ahead from people like Eric Sprott, Andrew McGuire, Alisdair McCleod, Turd Ferguson, Jim Willie, James Turk, Rick Rule, Max Keiser, etc., etc.

We'll see what the the world's big-dogs in PM's say about all this and what they theorize it could mean to the eventual ending of the Crimex.

Don't forget also that there are several new physical exchanges in Singapore, Shanghai, Russia, etc. that will now be working in direct opposition to the fraudulent paper Crimex, and people aren't going to give a rats ass anymore what the fraudulent, criminal  "paper" prices are going to be. 

Physical true prices will soon split from the bullshit paper prices and the Comex will finally close shop having no metals to back their paper bullshit.

Then we'll see where the true phyzz market takes us.  Until then, keep steadily stacking, sit back with a nice favorite coldy, and watch the fucking fireworks.

Thu, 05/15/2014 - 13:20 | 4763177 Debeachesand Je...
Debeachesand Jerseyshores's picture

Great Post SA1st,great post.....

Thu, 05/15/2014 - 09:50 | 4762230 Prisoners_dilemna
Prisoners_dilemna's picture

I would like to see silver fixing services provided in a free market according to free market principles.

Don't the "traders" performs that role?!?

Why would a centralized solution be preferable to a decentralized solution. Bankers vs Traders? Traders please!!

Didn't N. Taleb says "no stability without volatility".

Why doesn't everyone hate "volatility". It's natural.

 

If government is used to undo a government sanctioned monopoly; is that socialism?!?

Although to be honest I can imagine more exciting ways to "undo the government sanctioned monopoly". It involves guillotines.

Thu, 05/15/2014 - 09:26 | 4762188 MillionDollarBoner_
MillionDollarBoner_'s picture

Bullshit!!!

"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."

Eeerrrr...we dont "choose" to do business with the banks that run the Fix - we trade with third parties who use the Fix as a reference price. 

Does this joker know anything...other than the girth of his boyfriend's dick?

Thu, 05/15/2014 - 09:22 | 4762165 RaceToTheBottom
RaceToTheBottom's picture

If the actions of a few cents of a few guys on a phone were all it took to fix silver, we would not be seeing the irrational selling at huge volumes in light volume times.

I am worrying that TPTB already have the next fix lined up. Maybe the HFT will rape for a while?

There are many innings to this game.

Thu, 05/15/2014 - 09:44 | 4762095 Dickweed Wang
Dickweed Wang's picture

How convenient - the "traders" will make a fortune when the silver fix ends and everyone else will lose.  Same old shit . . . . . different day.

Thu, 05/15/2014 - 11:24 | 4762708 TheRideNeverEnds
TheRideNeverEnds's picture

It's over, silver is finished; sell it now before you have to pay someone to come take it away.  

Thu, 05/15/2014 - 12:22 | 4762932 BigJim
BigJim's picture

The shit is EVRYWHERE, man! Costs 5 bucks to get out of the ground!

Ah, I still remember 'Mathman'...

Thu, 05/15/2014 - 12:13 | 4762886 Bemused Observer
Bemused Observer's picture

I'll come and take it away for free...

Thu, 05/15/2014 - 10:58 | 4762624 J S Bach
J S Bach's picture

What's the purpose of an article like this which ends with...

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

 

In other words... "I'm not really an 'expert' and my guess is as good as yours."

 

What a waste of time.

Thu, 05/15/2014 - 11:25 | 4762714 Bay of Pigs
Bay of Pigs's picture

This guy is fucking terrible. What an embarrassment to see it posted here at ZH.

Thu, 05/15/2014 - 15:01 | 4763595 boogerbently
boogerbently's picture

Let's "resort" to common sense.

The last few years, sovereigns have been buying gold HAND OVER FIST !!!!

The only way they increase their profit is if gold price goes up.

WHY HASN'T IT ?

Thu, 05/15/2014 - 15:59 | 4763807 realWhiteNight123129
realWhiteNight123129's picture

Simple: The money printed goes into finanical assets, the problem with the majority of investors is that they do not understand that : 1. Financial assets are promises of cash flows in teh future, that those cash flows will need to be extracted from the GDP in the future (circulation of goods and services and commodities), but the current circulation of goods and services (today´s GDP) is ridiculously small in comparison to the present value (price) of promises of cash flows in the future. Buy the present goods (Gold) short the promise (TSY). The Dow-Gold ratio is the ratio of a promise of cash flows in teh future against something which is a present good (Gold) but it could be wheat, or basket of inelastic consumption (tobacco, etc...).

Wait 2.25 on teh 10 years for TSYs though.... 

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