These last few months have brought confirmation of an acceleration in geo-political and macro-economic events, and they all have mid-term implications for the precious metals markets and, more globally, on the future of the international monetary system.
Even though certain events might seem isolated, some links can be established, and this is the object of my analysis. I remain, in my analysis, of the opinion that the current fiat monetary system will collapse, as has been the case throughout History, and that we will eventually return to one or more currencies that would be convertible into tangible assets, such as gold. This Market Report will comprise several parts; let’s start by analysing the potential implications of the end of the silver fix in London.
LBMA : The End of the Silver Fix in London
The London silver fix will end in August, 2014. This fix is used as a benchmark, or proxy, for the physical silver market, but it mainly serves as a contractual basis for the determination of the value of silver derivatives and swaps, as defined in the official ISDA (International Swaps and Derivatives Association) document.
Watch also the Jeff Christian interview confirming the link between the London fix and silver derivatives.
Which means that, without the fix, the value of silver derivatives might be questioned, at least by the losing parties on some of those contracts. Those derivatives contracts will have to be re-negotiated, but on what basis? Why, in fact, honor a contract when the contractual basis, the fix, does not exist anymore? Some party might want to use the COMEX closing as a new base, but it won’t be able to impose it. And COMEX derivatives are futures contracts or options and, as such, do not constitute an accurate representation of the physical market.
So, unless there is a rebound and a new process of determination of the silver price (a new fix) is put in place before next August, which I doubt would come from the West, with all the judicial pressure building around the large banks. And we can add the silver derivatives which account for, all included, close to 100 billion ounces of « paper » silver that are at the risk of imploding. We will be guaranteed major misunderstandings and legal battles between parties, along with a questioning of the ability to « intervene » in the silver market through derivatives.
Parenthesis : China has stated in 2009 that it was reserving the right to default on « commodities-like » derivatives contracts, thus valid for silver, and it is possible, according to Ted Butler, that China is behind the enormous short position held through JP Morgan for hedging purposes on its massive physical silver buying. Will China take advantage of the end of the fix to default on its silver derivatives contracts ?
As GATA’s Bill Murphy confirmed to me this week, if the London silver fix is ending and that banks are retiring from the gold fix process, it is because they are feeling the heat and want to abandon ship before more global revelations come out on the price manipulations. The recent official condemnation of Barclays for manipulation of the gold price just confirms, even though they’re pleading this is an isolated case from one single trader, that the wind is turning and that the regulating agencies, mainly BAFIN in Germany, are starting to play their role. How else could one explain why the Deutsche Bank walked away from the gold fixing process in April ?
Or the firing of the gold trading desk chief for Barclays?
A german television station also just broadcast a documentary on gold price manipulation.
Therefore, the implication of the end of the London silver fix is, potentially, the implosion and the absolute end of the silver derivatives market, unless of course another price fixing mechanism is put in place before this coming August.
We know that certains banks are massively exposed to silver derivatives. US commercial banks are exposed to the tune of 23 billion dollars to them (table 9, OCC Report)
The gold fix might come to be questioned in the months to come as well and, just like with silver, might have tremendous consequences for the derivatives market if a new price fixing mechanism is not put in place.
Given the legal/judicial pressure on the large bullion banks, the new gold fixing mechanism will eventually come, at the end, from Asia, and it will be much closer to the reality of the physical market than the London fix. China definitely has a role to play in the imposition of a new fixing mechanism for silver.
In conclusion, without the derivatives, manipulation can still go on on the COMEX, but it will become much harder. The noose is tightening. The end of the London silver fix may be the first concrete manifestation of major problems to come for the big banks, one of them being the incapacity of controlling the price of precious metals, and of the return to a price fixing mechanism much closer the the reality of the physical market.
Interventions on the COMEX will last for a while, but the end of the fix will have important implications on the derivatives markets. The question, now, is when and how will the problem of defining a legal basis for silver derivatives contracts be solved.
Fabrice Drouin Ristori
Founder/CEO Goldbroker.com
ceo@goldbroker.com - Twitter @fabricedrouin
