London Silver Fix

On May 14, 2014 it was announced that one of the three banks involved with the fixing of the price of silver for the London Silver Market would cease to do so as of August 14, 2014.  The announcement fundamentally ends an industry benchmark that has been performed continuously since 1897.

So, what is the “London Silver Fix”, and why do we need it?  The London Silver Market Fixing Ltd serves as a brokerage for mines and refineries to sell silver at a price that is acceptable to them and to large users (jewelers, manufacturing, investment). The price is based on 1,000 troy ounce bars of .999 fine silver.  Before 1946 it was based on .925 fine (Sterling) silver.  The three banks involved: Deutsche Bank, HSBC and Scotia Bank, meet by telephone at 12:00 PM London Time to fix the day’s silver price.

Each day, if orders for 300,000 oz. (300 bars) of silver or fewer are offered for sale, or wanted for purchase at the price initially set by these banks, then the price is determined to be “fixed”.  If buyers are willing to purchase more than 300 bars of silver at the initial price, and these orders cannot be filled at the set price, the price is raised.  If sellers are willing to sell more than 300 bars of silver at the initial price, and there are no takers, the price is lowered.  This goes on until the amount of silver which the banks have orders for at the current price are for 300 bars or less, which fixes the price for that day.

But isn’t there a spot price set by the market?  Yes, but the spot price sets a moving price at which smaller sellers and purchasers of silver trade the devil’s metal.  The fix sets a benchmark from which the larger sellers and purchasers of silver can base their agreed price.  To purchase or sell contracts at the daily fix would require the purchase of at least 300,000 oz. of silver in 1,000 oz. bars.
There are many lawsuits in the works concerning some of the banks involved in the silver and gold fixes for collusion.  Settlements in the $billions have been made.  Such risks have made involvement in the fixing process untenable for some of the participants – so they have decided to get out of the silver market all together.

So what would the end of the London Silver Fix do?

It will make it much more difficult for the mining and refining industries to have an acceptable price at which their customers can purchase their product. And buyers will not know the price at which they can quickly and easily obtain the silver they need to do business, and make business decisions accordingly.  It won’t affect the smaller purchasers of silver, but it will make it much more difficult for the larger companies involved in the silver bullion business, which in turn make some of this silver available to the rest of the market. It will be interesting to see what all sides come up with as a replacement for something that has been around for over 100 years.  There will be a replacement, because as everyone knows, nature abhors a vacuum.

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