Silver Investors' Faith in Benchmark Threatened by Market Misses

  • Silver set more than 1% below spot price for two days in a row
  • `People are going to lose all faith in the fix,' Nabavi says

A daily silver price used as a benchmark by traders, miners and jewelers risks losing credibility with investors after it was set beyond levels traded on the market. One said the system seemed “broken” and another that clients had adopted alternatives.

The London Bullion Market Association Silver price was set at $13.58 an ounce Thursday, 3.5 percent less than the intraday low on the Comex in New York. On Friday, the LBMA price fixed at $14.08, about 1 percent under the level the spot metal was then trading at and less than the lowest intraday price in the futures market. 

“For the second time, we have seen a big discrepancy on the price,” Afshin Nabavi, head of trading and physical sales at MKS (Switzerland) SA, said from Geneva on Friday. “People are going to lose all faith in the fix if this keeps going.”

Investigating Activity

The benchmark is hosted by CME Group Inc. and Thomson Reuters Corp. under a five-year license from the LBMA and overseen by the U.K.’s Financial Conduct Authority. Bloomberg LP competes with Thomson Reuters in selling financial and legal information and trading systems, and posted a rival bid to host the silver pricing in 2014.

“We are investigating the trading activity that took place during the Thursday Jan. 28 auction,” Thomson Reuters said in a statement, adding that it would be “inappropriate” to comment further on the matter at this stage. The benchmark is set in “a transparent electronic auction mechanism designed to adjust the price until there is equilibrium between buy and sell orders,” CME spokesman Chris Grams said by e-mail Thursday.

The LBMA and FCA declined to comment.

Silver was the first precious-metal market to use a daily electronic-benchmark system in London in 2014. Deutsche Bank AG triggered the reforms after it withdrew from the old phone-based fixing that year and as regulators increased scrutiny of how benchmarks are set after probing price setting in interbank-loan rates, currencies and commodities. The new system promised greater efficiency and transparency.

‘Appears Broken’

A possible cause of the fixing being set beyond daily trading ranges is that increased regulation of financial institutions trading with their own money means participants in the silver market are unwilling to jump in and arbitrage disparities in pricing, said Ross Norman, chief executive officer of Sharps Pixley, a London-based precious-metals dealer.

In a Jan. 6 auction, trading lasted 60 rounds, with the process taking almost half an hour to complete. In comparison, the LBMA Gold price, hosted by ICE Benchmark Administration, settled at $1,112.90 an ounce after five rounds of trading on Friday morning in London. That was less than 0.1 percent lower than the prevailing spot price.

“When Thursday’s number came in, people initially thought CME would void it, it was so far out of line with the market,” Brad Yates, head of trading at Elemetal Capital LLC, which trades silver and offers precious metal risk management services, said by phone from Dallas. “When they endorsed it and it became the official print, the benchmark immediately lost credibility. We had two clients shift business away from pricing on the fix to live pricing.”

The silver benchmark has settled outside the same day’s spot trading range at least 10 times in the last six months, compared with twice for gold, according to data compiled by Bloomberg. This had implications beyond the single trading day, as it affects transactions based on averages and price barriers, according to Simon Grenfell, global co-head of commodities at Natixis SA, an LBMA member bank which offers silver trading and risk management services.

“The new silver price setting mechanism appears broken,” Grenfell, said in an e-mailed statement. “It is clearly an issue that the regulator should be looking at.”

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