New Silver Benchmark Seen Heralding Gold Fix Revamp

Proposals to replace the 117-year-old system of fixing prices for the $5 trillion silver market are poised to add more transparency for the London benchmark used in the $18 trillion gold industry as well.

London Bullion Market Association members will hear firms’ proposals tomorrow for alternatives, including electronic trading, to replace the silver fixing by banks that began in 1897. The daily procedure will end Aug. 14, when Deutsche Bank AG quits the meetings as part of the German company’s exit from commodities, leaving just two banks to set prices. The World Gold Council yesterday called for a meeting next month for the industry to discuss changes to its own valuation process.

Precious metals are getting more attention from regulators after price rigging in everything from interbank lending rates to currencies led to fines and overhauled financial benchmarks. The U.K.’s Financial Conduct Authority in May fined Barclays Plc after a trader sought to influence the gold fix in 2012. An LBMA survey last month showed the market wants a new silver system to be an electronic, auction-based process with more direct participants and prices that can be used in trades.

“The process is somewhat antiquated,” Courtney Lynn, the treasurer for Chicago-based Coeur Mining Inc., the biggest U.S.- based primary silver producer, said June 12. “In that sense, it could use some updating. If the silver process ends up working well and the market feels that they can remove a certain level of regulatory risk, I think they’ll opt to move to the silver pricing mechanism” for gold, she said.

Fixing Prices

About $5 trillion of silver and $18 trillion of gold circulated globally last year, according to CPM Group, a New York-based research company. Silver was fixed at $19.94 an ounce in London today, for a 2.3 percent gain this year. Gold climbed 7.3 percent this year to $1,293 an ounce by its afternoon fixing today. Gold for immediate delivery reached a record $1,921.17 in 2011, the year silver touched $49.8044, according to Bloomberg generic pricing.

London Silver Market Fixing Ltd. said in May it would stop administering the benchmark, used by everyone from mining companies to central banks to trade or value metal, once Deutsche Bank ends its participation on Aug. 14. The German lender, HSBC Holdings Plc and Bank of Nova Scotia conduct the silver fixing, which first took place more than a century ago at the office of Sharps & Wilkins with former dealers including Mocatta & Goldsmid, Pixley & Abell, and Samuel Montagu & Co.

Deutsche Bank

Deutsche Bank, Germany’s biggest lender, said in January that it would withdraw from participating in setting gold and silver benchmarks in London, a month after announcing that it would cut about 200 jobs in commodities and exit dedicated energy, agriculture, dry-bulk and base-metals trading. JPMorgan Chase & Co., Morgan Stanley and Bank of America Corp. also are retreating from raw materials.

Politicians and regulators have pressed banks to cut back their commodities activities to reduce balance-sheet risk, while earnings were eroded by lower volatility in raw materials and reduced client interest. Market-making and liquidity in the European and U.S. power, industrial metals and bulk commodities areas suffered the most as banks retreated, Paul Hawkins, global head of commodities at Credit Suisse Group AG, said at a briefing in London on May 22.

During fixings, member banks declare how much metal they want to buy or sell for clients as well as their own accounts. Traders relay shifts in supply and demand to clients and take fresh orders as the spot price changes, before the fix is made. Participants can trade the metal and its derivatives on the over-the-counter market and exchanges during the calls.

Companies’ Proposals

Autilla Ltd., Bloomberg LP, CME Group Inc./Thomson Reuters, ETF Securities Ltd., Intercontinental Exchange Inc., the London Metal Exchange and Platts will present proposals for a new silver mechanism at a seminar in London tomorrow, the LBMA said in a statement today. The solution should be agreed by the market and announced in early July, after consultation with regulators, it said. Testing is planned for early August.

A new gold mechanism or changes to the current procedure should be based on executed trades rather than submitted quotes, be tradeable and not just a reference price, while data should be transparent, published and subject to audit, the World Gold Council said in a statement yesterday. It will hold a meeting July 7 in London for the industry to discuss changes.

“The fixing process needs to be reformed,” Natalie Dempster, managing director, central banks and public policy at the council, said yesterday in a phone interview. Still, whatever method is developed for silver won’t necessarily be appropriate for gold, partly because of differing user bases and supply chains for each metal, she said.

Prices Published

While there’s been no notice from fixing banks or regulators that the gold rate should be replaced, the processes for setting gold, silver, platinum and palladium are much the same. Fixing companies, the LBMA and the London Platinum and Palladium Market publish the rates on their websites. Trade and volume data aren’t disclosed.

Societe Generale SA, Bank of Nova Scotia, HSBC and Barclays are the four remaining members of the London gold fix, which takes place twice daily and dates back to 1919. Spokesmen for Societe Generale, Barclays and HSBC declined to comment. Joe Konecny, a spokesman for Bank of Nova Scotia, didn’t reply to voice messages or e-mails sent by Bloomberg.

Fixing Company

Nobody was available to comment when calls were made by Bloomberg to a phone number listed on the London Gold Market Fixing Ltd.’s website. Douglas Beadle, who has been a consultant to the fixing company, didn’t reply to a message left by phone.

The LBMA is “happy to participate in discussions on issues which are designed to ensure the continued efficiency” of the gold and silver markets, Ruth Crowell, chief executive of the organization, said in an e-mailed statement yesterday.

The fixing still works well, even as scrutiny on the way prices are set has increased, according to David Govett, the head of precious metals at Marex Spectron Group in London and a trader for 30 years. With four members still setting the gold rate, the benchmark could continue, he said.

When asked to rate the usefulness of the current silver mechanism on a scale up to 10, an LBMA survey in May of more than 440 participants returned an average of 7.5. Sixty-four percent said they use the fixing daily and 72 percent said the price discovery method is sufficient.

Manipulation Possible

While traders say fixings are efficient and a crucial reference point, economists and academics say the process is susceptible to manipulation and lacks sufficient regulation. Germany’s Bafin is looking at benchmarking processes such as gold and silver price fixing at individual banks, a spokesman for the Bonn-based regulator said in April.

At least nine financial firms, including Deutsche Bank and Barclays, have been fined more than $6 billion for manipulating the London interbank offered rate, or Libor, and related benchmarks. Twelve people are facing prosecution in U.K. investigations. Regulators and prosecutors across three continents are also looking into possible manipulation of the foreign-exchange market in a probe that has seen more than 30 traders fired, suspended or put on leave.

Britain’s FCA has been visiting member banks involved in the gold fixing this year as part of its review of gold benchmarks, a person with knowledge of the matter said in April. The regulator said May 23 it fined Barclays 26 million pounds ($44 million) because one of its traders sought to influence the price-setting process in 2012.

New Benchmark

A new benchmark won’t be developed in the style of the present fix, Brian Lucey, a finance professor at Trinity College Dublin who has been an economist for the Central Bank of Ireland, said by phone June 17.

“When the gold and silver fixes were first set, they were pretty much the only game in town,” Lucey said. “Now we have the data which allows us to get a really good handle on the market. A mechanism that gives more information about more of the market is better for all.”

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To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editors responsible for this story: John Deane at jdeane3@bloomberg.net Steve Stroth

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