There are many practices that are legal in the financial world and hardly anywhere else. Selling something you don’t own is a great example, known as shorting. Typically people will short sell a security, such as a stock or commodity, with the anticipation that the price will fall allowing the seller to go into the market and buy it for less, transferring the security to the buyer to cover the short.
The financial industry also has many colorful names for their practices, including naked shorts, where you sell a security without knowing for sure that you can even acquire it to meet the obligation of the sale. Whatever it means, the name fits as the seller is figuratively standing naked in the room hoping that someone will sell him the security he needs to make good on his sale. Due to the law of supply and demand, selling more of something than exists increases the perceived supply lowering the price, even if the actual supply doesn’t exist.
As confusing as this can be initially, this is just the tip of the iceberg of follies played in financial institutions worldwide. All this is done in the pursuit of money, and specifically, of higher returns on money invested. When you don’t know which way the market is going to move, it’s risky. When you do, it’s child’s play.
Commodity Price Fixing
Welcome to the world of price-fixing. You’ve all heard it before. Someone fixes the outcome of a sporting event, whether it’s a boxing match or a football (soccer) game. Betting money of such endeavors when you know that the fix is in alleviates the risk for those in the know while creating an unfair advantage over those who assume that the playing field is fair and level.
Financial analysts have shown time and time again, especially in recent years, that pricing fixing is common practice in the industry. In many cases, it’s even legal and touted as advantageous. Silver fixing is one of those cases.
The company, London Silver Fixing Limited (LSFL), runs the process known as the London Silver Fix . This institution, having fixed silver for over 100 years, is one of many financial businesses located in the City of London, the UK’s equivalent of the US’s Wall Street, yet more influential in many ways than Wall Street. The LSFL recently announced, despite its long-time experience of fixing silver, that is will end this practice on August 14, 2014.
The Price Fixing Process
Silver price fixing is a process that is done daily by conference call between several major banks. A price is determined in this call by exchanging bid prices and offer prices for silver, effectively buy and sell orders, for the banks and their large clients. The price is determined by reviewing these orders, the supply and demand for silver, and determining a price that balances them, or so they state.
Silver is traded 24 hours a day worldwide. Prices fluctuate many times throughout the day, depending on the buys and sells that come into the market. Some argue that a daily fix helps larger companies, especially mining and industrial companies, conduct business without concern for price changes that occur during the day. The price fix eliminates the volatility of silver prices. However, due to increased focus on the price setting by analysts and authorities, and the potential for manipulation in favor of larger banks and its preferred customers, members of the daily silver fixing process including Deutsche Bank in Germany have resigned their positions, causing the LSFL to discontinue this practice.
What Does This Mean for Bitcoin?
No one knows for sure what the impact will be on silver, gold, or bitcoin will be. It does seem quite positive for commodities moving forward, however.
Allowing buyers and sellers of commodities, whether silver, gold, or bitcoins, to trade freely based on demand is the purpose of markets. Markets are intended to create liquidity, to create a place where buyers and sellers of anything of value can trade fairly and at will. However, the silver price fix won’t solve all the problems of price manipulation.
As the price of commodities is often based on the spot prices, that is based on future contract prices and not on physical trading of the commodity, there will continue to be a gap in the perceived and actual value of commodities like silver. Discussing spot prices would take much more time that we have available, so suffice it to say that there are 10 to 100 times more paper silver and paper gold in the world than physical silver and gold.
This means that if everyone with the paper wanted to exchange it for the physical metal, perhaps only 1 in 100 would actually receive the physical product. This is a form of manipulation, especially when large banks have been proven to place large naked shorts on gold and silver in the past to keep the price of these metals low, most likely allowing them to purchase the metals at preferred prices to eventually cover at least some of their future obligations.
Bitcoin As a Commodity
Viewing bitcoin as a commodity and its marketplace as a decentralized network of buyers and sellers allows us to see the potential future of silver prices. Bitcoin experienced significant volatility in 2013 and into 2014, leading to a period of stability before rising again to a recent price around $650 per bitcoin.
I suspect that silver will increase in volatility as well following the expiration of the silver fix process. And, over time I expect it to increase in value to better reflect actual demand. Although I’m not so naive to expect this to occur immediately following the end of the fix, I do expect more accurate pricing of silver in the months that follow. To be clear, I mean that silver will likely increase in value if this plays out as I envision. (Note that I am not a financial analyst, so be sure to make your own well-informed investment decisions.)
Bitcoin Is Fair Money
Bitcoin is difficult to manipulate. Unless you own a large share of all bitcoin in existence, there isn’t much that you can do to unfairly change the price. Just as the value of fiat currencies like dollars and euros as sensitive to news report, bitcoin prices are also sensitive to media reports, whether positive or negative.
As various jurisdictions make it more difficult to use bitcoin, as bitcoin exchanges and other trusted bitcoin companies fail, and as the existing fiat currencies like dollars and euros continue to be propped up by central banks legally manipulating their values, bitcoin prices will likely fall or remain soft. However, as new companies adopt bitcoin as a payment method, as more investment flows into bitcoin companies and research, and as simpler and easier ways to transact with bitcoins are introduced allowing more people to use bitcoins, expect bitcoin prices to rise and remain strong.
Bitcoin provides the fair marketplace that we deserve and that we are demanding today in our marketplaces. Bitcoin’s fair marketplaces allow bitcoin to provide fair money, no longer needed to tolerate the chronic manipulations of the financial industry. As more commodities are allowed to express their true market values, I believe that all commodities — bitcoin included — will more accurately reflect their true values.