The exposure of rogue trading within Barclays has rattled the major banks involved with the London Bullion Fix of silver and gold. The London silver fix, which includes Barclays and five other leading banks, have called for an end to their involvement as of August this year.
With Deutsche Bank already pulling out of the scheme earlier this year with the official line it is cutting back on commodities, it seems banks are turning from the heat being applied to them by banking regulators. Some commentators believe the pulling is due to the rate rigging scandal. Banks are expected to retire from the gold fix too.
The London fix is used as a benchmark for trading in the physical silver market on a daily basis, and also includes the value of silver derivatives which affects the earnings of mining companies. If the fix is not replaced with a suitable alternative there could be problems with the honouring of silver contracts in the derivatives market. So what are the alternatives?
China step up
Considering judicial pressure on bullion banks in the West, there is a strong possibility precious metal fixing will switch to Asia. China is lying in wait to take up the mantle and the role could be the first step towards the Republics plan for more control over the global economy.
Five years ago China declared it was reserving the right to default on derivative contracts and are believed to be behind the short position on hedges, currently dealt with through JP Morgan. The end of the silver fix is certainly a prime opportunity for the Central Bank of the People’s Republic to take advantage.
However, given the suspicions held over banks, will financial regulation bodies, and indeed money managers, be happy about handing the fix over to the banks, particularly considering that Chinese bank HSBC were one of the four policy makers on the London silver fix. Independent parties may be preferred.
Stepping forward is the Canadian/US bullion dealer, Kitco, who are already alluding to the fact they are capable substitutes by posting daily benchmarks on their website using a specially formulated algorithm that calculates the average spot price between offers on wholesale silver sales.
Latest bid from CME
The latest firm to put themselves forward is US firm CME Group Inc. who confirmed their interest to fill the impending void. With office in Chicago and New York, CME is one of the largest companies handling derivatives and futures exchanges and present a middle-ground option that is more likely to be trusted by investors and regulators.
A statement released by the company on Thursday confirmed the company was working closely with the London Bullion Market Association (LBMA) with a view to reducing “market disruption.” Although the Wall Street Journal report discussion are in the early phases CME represent a workable option to continue to fix of daily spot prices efficiently.
With the noose tightening around leading banks, the silver fix scandal could be the first of a long string of problems for the financial markets. Given gold and silver can be used as legal tender, it is a savvy invest to buy precious metals to protect yourself against a potential banking crisis.