Silver markets have changed substantially from a year ago. In August 2014, spot prices hovered around $20 and were in the early stages of a decline. After 12 months of anticipation around when the Fed will raise rates, China’s economy slowing and a nearly unprecedented drop in oil prices, silver has continued its fall to levels not seen in more than five years.
August 2014 was also when the global spot benchmark for silver changed for the first time in 117 years with CME Group and Thomson Reuters providing the first electronic platform for a precious metals fixing. In many ways, the timing of the change could not have been better. The new platform removed the daily call among a few banks, and replaced it with a more transparent process that allows greater participation in setting the daily price. The spot fixing is now known as the LBMA Silver Price as the London Bullion Market Association owns the intellectual property.
After a year filled with volatility for silver markets, how has the industry transitioned to the new system, and is it better for silver markets? To get answers to these and other questions, we spoke with Harriet Hunnable, CME Group Executive Director of metals products and Michael DiRienzo, Executive Director of the Silver Institute, the industry’s leading advocacy group.
What has changed in the first year of running the LBMA silver price mechanism?
Harriet Hunnable: This key London benchmark has been transformed. We have been able to take the London market through that change, and it has been a smooth transformation. Once we had the mandate, we had less than five weeks to put the platform up, and to get participants signed up. We managed that, and the participants managed that change very well. Sometimes I think we made it look too easy when in fact the effort and resources involved was huge.
After the launch, participation doubled. That’s very important for a benchmark, and also for the place that London plays in the global precious metals market.
In the last six months the benchmark moved into a fully regulated regime with new requirements from the U.K. Regulator, the FCA. We worked very hard with the U.K. Regulator, the LBMA, Thomson Reuters, the participants and the industry to successfully meet all of the requirements for a regulated benchmark.
Michael DiRienzo: We are very happy not only with the process to date, but also the process in which we’ve achieved a steady hand in the market. A lot of thanks go to CME Group and Thomson Reuters, and also to LBMA in terms of their leadership in rapidly coming to a selection, and allowing the continuity for the end users of silver to allow their contracts to go forward. We represent producers, end users, refiners, and we have been very pleased with the continuity.
Our members are looking for a reliable figure that will be globally accepted by all players in the market, and that is something that happened on day one.
Have you seen greater participation from commercials or non-banks?
HH: Mike has just highlighted what makes a benchmark. If the commercials are not using the benchmark for their day to day business, then the relevance of the benchmark would be undermined. What has been important for us is making sure commercials are using the benchmark to price physical deals. And to ensure that they can put orders into the platform whether directly or through the participants, and they satisfied with how that is going.
We were very pleased right at the beginning to transform the process by bringing not only banks, but a commercial, Mitsui, to the platform. There is interest from a few other commercials as well. The key thing is whether commercials can continue to conduct their business in the benchmark.
The new mechanism is also electronic. What kind of difference has that made in the process?
HH: This benchmark used to be a telephone call around price with no audit trail, no record and no ability to query. We immediately transformed the functionality to make it a central platform where people could put in their orders, but also where there was an audit trail, rules and methodology.
In July, this became a fully automated process. It is the only fully automated process among all of the precious metals price mechanisms. We’ve been able to look back at the data to assess how that is going, and we can see that the algorithm is working well, and the markets have adapted to it well.
MD: What we were concerned about primarily on the day it was announced that the old London fix was going to transition was that there would be a seamless transition to a global, agreeable market price. From our standpoint, we see that that has not only been achieved, but it continues to be improved upon and continues to include more participants in the process.
Greater transparency has been a selling point of the new mechanism. How has it enhanced transparency into the price-setting process?
HH: Before there was simply a final price that was published. Now people can see in real time how the price is being made, the volumes of orders that have been put into the auction, and the final volume that is transacted at that price. Anybody can have insight about what’s happening in the benchmark. That is a huge transformation.
It is important for a benchmark that people are confident in the price. If they can understand there are a good number of participants there, that there are genuine orders going in and they can analyze data, they can have much more confidence in the validity of the price.
MD: Discovery is there. Everything we need in terms of transparency is there. I have not had one entity come to the Institute with concerns. The transfer to the new price mechanism was seamless from one entity to the other. To those entities that request a price, they can find it.
This summer was full of news that potentially impacts silver markets, from the potential for a Federal Reserve rate increase to China’s deceleration. How have those events impacted silver trading?
HH: I think the outlook for silver is good in terms of do people want to trade it, do people want to invest in it, do people want to use it for industry. Barclays recently published a report on which commodities China would be looking to import after the financial crisis, and silver was one of those. That is demand driven particularly around the industrial use of silver for clean energy.
We have also noticed that silver has an important place in retail trading. For investors that have concerns about the macro outlook or want to own precious metals, silver is a highly traded commodity both in Asia and in the West. It’s a more freely traded precious metal than gold. There are fewer restrictions globally around trading silver, and we think that is an important distinction between silver and gold that people underestimate.
MD: In the first half of 2015, we have seen greater demand for jewelry and for industrial applications – two very strong signals for demand growth in what we consider the most versatile of all the precious metals.
The Thomson Reuters GFMS anticipates silver jewelry will grow 5 percent globally in 2015, and silver for industrial use will grow by 2 percent. We predict there will be a deficit in the market of 60 million ounces in 2015. As supply contracts and demand grows this has to be met by a drawdown by above ground stocks. That’s one part of a very compelling story for silver, that the fundamentals are strong.
Silver has bounced back slightly from its lows in late August, but it is still far below its range of a year ago. Are fundamentals changing, or is the volatile environment here to stay?
HH: We have moved from a period where the market was very concerned about U.S. interest rates, to where the market is also focusing on China’s slower growth and the price of oil. Mining companies and others have changed their price outlook based largely on those two factors.
Oil moving downward has had an impact across commodities. Silver is an industrial metal, so the fundamentals are more important than for gold, but as so much production is a byproduct of other metals, it may only be at lower prices levels than now that production would be impacted.
MD: Overall, what you’re seeing is a very compelling narrative for silver. It is a dual metal, prized for industrial uses and investment. The LBMA silver price has gone a long way toward providing stability to what could have been a very rough period.