It was reported last week that Deutsche Bank has settled
lawsuits over allegations it manipulated gold and silver prices via the “London
Fix“. This is not really news, in that experienced traders would already
be aware that banks and other large-scale operators regularly attempt to
shift prices one way or the other in most financial markets to benefit
their own bottom-lines. I just wanted to point out that this “news” does not,
in any way, shape or form, constitute evidence that there has been a
successful long-term price suppression scheme in the gold and silver markets.
As far as I can tell, the banks that were involved in setting the
twice-daily levels for the London gold and silver fixes had two ways of using
or manipulating the ‘fix’ to generate profits. The first is that the
participants in the fixing process were privy, for two very brief periods
(10-15 minutes, on average) each day, to non-public supply-demand
information, making it possible for them to obtain a very brief advantage in
their own trading. For example, if the volume of gold being bid for was
significantly greater than the volume being offered near the start of a
particular day’s fixing process, a participant would know that the price was
likely to rise over the ensuing few minutes and could enter a long position
with the aim of exiting at around the time the ‘fix’ was announced.
The other way of using or manipulating the ‘fix’ to generate profits is
more sinister, as it essentially involves the ‘fix’ participants stealing
from their clients. I’m referring to the fact that although the ‘fix’ is
primarily a market price, in that it is designed to reflect the bids and
offers in the market at a point in time, the participating banks would have
the ability to nudge the price in one direction or the other. Situations
could arise where a participating bank could improve its bottom line at the
expense of a client by influencing the ‘fix’ in a way that, for example,
prevented an option held by the client from expiring in the money or allowing
the bank to purchase gold from the client at a marginally lower price.
I don’t know that the participants in the London ‘fixing’ process
sometimes used the process to increase their own profits at their clients’
expense, but I wouldn’t be the least bit surprised if they did. There was
certainly a huge conflict of interest inherent in the way the ‘fix’ was
conducted.
Anyhow, it’s important to understand that price distortions resulting from
the ‘fix’ would have existed only briefly (for less the 20 minutes in all
likelihood) and could not have affected the price trends of interest to
anyone other than intra-day traders. In particular, there is simply no way
that a multi-month price trend could have been shifted from bullish to
bearish or bearish to bullish by manipulating the London gold or silver fix.
