LBMA silver benchmark disparity worries market participants

Jan 28, 2016 - 7:24 PM GMT

Gold futures were steady in the wake of latest Federal Reserve policy statement but it was the silver market that garnered the most attention on Thursday because the LBMA Silver Price appeared to be out of the market.

The silver market was thrown into disarray after the LBMA Silver Price settled 84 cents below the spot and futures price this morning.

The LBMA Silver Price – the crucial daily benchmark used by producers and traders around the world to settle silver products and derivatives contracts – was set at $13.58 per ounce.

At the time of the auction, which begins at noon London time, the spot price was at $14.42 per ounce while the futures price on the CME was at $14.415, leaving a number of market participants extremely confused as to what has happened. A CME spokesperson said that the low LBMA Sliver Price was not the result of a system error.

“Given the orders placed in the auction today by five participants, the buy and sell orders became balanced after 29 rounds and the LBMA Silver price was established at a price of $13.58,” CME said in a statement.

CME and Thomson Reuters won the battle to provide the methodology and price platform for the daily process back in July 2014, replacing the 117-year old fix in August that year under sweeping reforms of the entire precious metals complex.

But this six percent gap between the LBMA fix and futures was seen by many as a major problem. Many producers, who still use the price as their daily reference, may have lost significant amounts of money if any contracts have been settled according to the fix.

“Unfortunately, it’s not [a mistake],” Ole Hansen, head of commodity strategy for Saxo Bank, told FastMarkets. “This could be the end of the fix. It took 14 minutes to find a fix – they obviously found a fix way off of the market.”

Comex silver for March delivery last traded at $14.245 per ounce, down 21.4 cents for the session. Trade ranged from $14.07 to $14.54.

Comex gold, meanwhile, was last down 40 cents at $1,115.90 per ounce. Trade ranged from $1,110.20 to $1,126.40.

“The markets interpreted the latest FOMC statement as dovish on balance, and this has helped gold reach the highest level since November at $1,128, just a few dollars shy of the 200-day moving average,” UBS analyst Joni Teves said.

The Federal Open Market Committee (FOMC) concluded its two-day meeting yesterday afternoon saying it was “closely monitoring global economic and financial developments” and its impact on the US labour market. However, the policy-board didn’t indicate it was slowing or halting the current rate-cycle and is maintaining the federal funds target of two percent by the end of 2016.

“Gold is trying to make itself comfortable above the $1,100 psychological level,” said Teves, who noted that ETFs continue to increase and latest data shows that around 1.79 million ounces have been added to global holdings so far this month.

“A more measured rebuilding of gold positions increases the likelihood that gains are more sustainable and reduces the risk of the market getting ahead of itself. But even though more participants across the board are starting to pay attention to gold, larger and more strategic positions have yet to be taken,” she added.

In today’s data, US core durable goods in December at -1.2 percent missed the estimate of -0.1 percent durable goods order sat -5.1 percent was sharply below the forecast -0.6 percent. Weekly unemployment claims at 278,000 were better than the forecast 281,000 and below the psychological 300,000 mark.

As for the wider-markets, the dollar was 0.63 percent softer at 1.0963 against the euro, whole the Dow Jones industrial average and S&P 500 were up 0.39 percent and 0.49 percent respectively.

Platinum futures for April delivery on the Nymex fell $14.90 to $867.20 per ounce, while the most-actively traded palladium contract was at $491.75 per ounce, down $10.50

(Additional reporting by Ian Walker)