Caesar: Who is it in the press that calls on me? I hear a tongue shriller than all the music cry “Caesar!” Speak, Caesar is turn’d to hear.
Soothsayer: Beware the ides of March.
Caesar: What man is that?
Brutus: A soothsayer bids you beware the ides of March.
Shakespeare’s Julius Caesar Act 1, scene 2.
Caesar ignored the soothsayer’s warning, went about his business normally on March 15th (the “ides” of March) and was assassinated on that day.
I’m not a soothsayer and I don’t expect anyone important to be assassinated on or about the “ides” of August (August 15th). But I strongly suspect that August 15th might mark the start of a dramatic change in the prices of silver and, soon after, gold.
Here’s why: On August 14th, the “London Silver Fix”—the financial institution composed of three major banks (Deutsche Bank, Bank of Nova Scotia, and HSBC) that set/”fixed” the daily price of silver for over a century—will definitely cease to exist.
Next day (on August 15th), the “London Silver Fix” will (probably—but not yet, definitely) be replaced by a new-and-improved institution called the “London Silver Price”.
Given that there’s so little difference between the names of the old and new institutions, we might suppose that there’ll also be virtually no difference in their function, authority and power.
“The Fix is dead—Long live the Fix!,” hmm?
But I doubt that’s true. If a major financial institution that’s enjoyed enormous power and profits for over a century is about to voluntarily dissolve, there must be an extraordinary, underlying reason for that dissolution. I believe that reason involves the growing threat of legal liability—both civil and criminal—for the three banks that have heretofore “ruled” and profited from the London Silver Fix.
According to ZeroHedge.com, on July 26th,
“It was reported that the silver bullion banks (Deutsche Bank, Bank of Nova Scotia and HSBC) were sued for manipulating the silver fix in a class-action lawsuit.
“Another class action lawsuit [was] filed on July 9, 2014 against the London gold fix member banks: Bank of Nova Scotia, Barclays, Deutsche, HSBC and SocGen.”
The gold-manipulation lawsuit alleges that:
“. . . from approximately January 1, 2004 to the present, Defendants manipulate the prices of gold and gold derivatives contracts on their own and combined, conspired, and agreed with one another and unnamed co-conspirators to manipulate the prices of gold and gold derivatives contracts. This agreement was intended to permit each Defendant individually and all Defendants collectively to reap profits from their foreknowledge of price movements in the gold market.”
Depending on their verdicts, these lawsuits may be significant. But a greater significance may be that either:
1) The “The Powers that Be” have abandoned the previously “protected” gold and silver “Fixes” and have allowed them to be sued for reasons which remain to be discovered; or
2) “The Powers that Be” that previously operated, and profited from, the “Fixes”—have grown too weak to protect the gold fix and silver “Fixes” from being sued.
In either case, something strange and potentially extraordinary seems to be taking place with the closure of the London Silver Fix. Perhaps, we’ve reached a monumental turning point.
• I can’t say that these July lawsuits caused the demise of the London Silver Fix (and, later perhaps, the London Gold Fix). It’s been common knowledge since at least June that the London Silver Fix would close on August 14th. Thus, the decision to close the London Silver Fix was made at least a month before these two lawsuits were filed.
Still, these lawsuits may have been in the works for most of a year. The banks running the Silver and Gold “Fixes” may have anticipated a coming wave litigation (everyone who’s ever lost money in the gold or silver markets may want to sue the “Fixes” and the “fixers”). Therefore, the bankers may have decided to abandon the Silver Fix in order to limit their legal liabilities.
Whatever the precise cause(s) for the London Silver Fix to close its doors may be, growing threats of legal liability must’ve weighed heavily in that decision.
If the three major banks are being driven out of the lucrative and powerful positions within the existing London Silver Fix by threats of legal liability, it follows that the proposed London Silver Price will be subject to the same legal liabilities if it engages in similar conspiracies to manipulation the price of silver. That, in turn, suggests that the newly-proposed London Silver Price will be unable or unwilling to manipulate the price of silver to the same degree as has been true for at least a decade under the London Silver Fix. And that implies that, starting August 15th, the price of silver will be at least less manipulated.
All of which suggests that the price of physical silver will soon become more volatile and may rise significantly, perhaps dramatically, soon after the “ides” of August.
“Silver derivatives” are hedging instruments used as “insurance policies” to protect silver investors against a dramatic rise or fall in the price of silver. The current silver markets are at least partially affected by “silver derivatives”. Therefore, the consequences of ending the London Silver Fix may extend beyond mere price increases for physical silver.
For example, under some circumstances a silver investor might stand to lose a lot of money if the price of silver exceeded $25/ounce on, say, September 1st. Therefore, he might invest in a silver derivative that guaranteed to pay him some amount of money if the price of silver rose above $25/ounce on September 1st. Thanks to the derivative, he’d be compensated for whatever loss he suffered by a significant rise in the price of silver.
Another investor might suffer a loss if the price of silver fell below $18/ounce on, say, September 27th. Therefore, they might purchase a silver derivative that guaranteed to pay him some amount of money if the price of silver fell below $18 on the 27th.
I’ve highlighted the previous mentions of “price” because silver derivatives are all about price. If the price of silver rises above or falls below a certain level, the institution that issued a silver derivative may have to pay up.
All of the silver derivatives sold before May or June of this year were purchased by means of contracts which usually included an enormous presumption that’s now become a problem. It was presumed that, because the London Silver Fix was an institution that’d been around for generations, the silver derivative contracts that depended on the price of silver on a particular date would naturally be determined by the London Silver Fix.
Before last June, virtually no one dreamed that the London Silver Fix could cease to exist on August 14th. Therefore, virtually no one entering into a silver derivative contract prior to June included any contractual language that provided for a price determination by some other entity if the London Silver Fix ceased to exist.
But if the London Silver Fix expires on August 14th, who or what entity will determine the price of silver after that date?
The implications of this question are huge.
To illustrate, let’s suppose that, last January, I contracted with an automobile dealer to buy a new Cadillac on September 1st for, say, $40,000 on a lay-away plan. Let’s suppose that, much to everyone’s surprise, Cadillac goes out of business on August 14th. Can the dealer therefore give me a Ford or Chrysler instead of the promised Cadillac? Can I refuse to pay the $40,000 or demand the return of whatever I’ve already paid on that contract?
A contract is a contract. When circumstances change making the express terms of the contract impossible to fulfil, the contract is arguably voidable and could provide grounds for losses and litigation lasting for years.
Similarly, given that: 1) silver derivatives are primarily based on changes in the price of silver; 2) most previous silver derivative contracts specified that that each day’s price will be set by the London Silver Fix; then 3) what happens if the London Silver Fix ceases to exist?
If a silver derivatives contract specified that only the London Silver Fix would determine the price of silver on a particular day after August 14th, and no proviso was included for an alternative authority to set the price of silver, how can the terms of silver derivatives contract be enforced?
After all, the real (free-market) price of physical silver is not obvious or universal.
I.e., if you ask people what they think the true price of silver is today, some might ask you if you’re talking about physical-silver or paper-silver. As I write this article, the New York spot price of “paper” silver is $20.48, but if you ask me, the real price of physical silver should be at least $50/ounce. Ask someone else, and he might say the real price of physical silver is $100, maybe $500—and some might even claim $1,000/ounce.
Why is there so much disagreement as to the price of physical silver? Because that price has been “fixed,” manipulated and suppressed for a decade or more by financial institutions—including the London Silver Fix.
But once the London Silver Fix ceases to exist, there may not be a single authority able to “fix” the price of silver. Even if some new authority emerges, what impact can that authority have on silver derivative contracts that expressly depend on the price determinations by the now-dying London Silver Fix?
The loss of the London Silver Fix will create an opportunity for any party to a silver derivative that’s likely to suffer a financial loss based on that derivative, to declare that the underlying contract is no longer unenforceable and is therefore voidable. Given that every silver derivative includes one winner and one loser, about half of the parties to silver derivatives (the losers) may have an incentive to cancel their contracts. The result could be a lot of silver contracts whose validity is denied and/or rendered unenforceable.
What’s the value of silver derivative that can’t be legally enforced?
I don’t know what percentage of the current market prices for paper silver can be traced to silver derivatives that expressly rely on the London Silver Fix to set prices after August 14th. But I’ll bet the silver markets are at least partially dependent on such silver derivatives. If those derivatives turn out to be unenforceable and therefore worthless, how will that affect the market price of paper silver?
Nobody knows for sure.
Still, in the midst of this price uncertainty, what can we expect?
Volatility. Mucho volatility.
In fact, there might be so much volatility after August 14th, that we might describe the markets as chaotic. Prices go up dramatically and unpredictably. Prices go down dramatically and unpredictably.
But mostly, due to fundamentals, prices go up dramatically.
• All of the previous speculation is based on my opinion that silver derivative contracts that expressly rely on the London Silver Fix to set the price of silver on any date after August 14th may soon be unenforceable and worthless.
Although I did run for Place 1 of the Supreme Court of Texas in A.D. 1992, I’m not a licensed attorney and I don’t have access to all of the facts affecting the validity of silver derivatives. Therefore, my opinions on the law should not be relied on. Even so, it appears I’m not the only one who doubts the enforceability of silver derivatives that rely on prices set after August 14th by the London Silver Fix.
On July 30th, the International Swaps and Derivatives Association (ISDA) published a “Bilateral Form of Amendment Agreement for Certain Silver Transactions”. According to the ISDA,
“ISDA has published a Bilateral Form of Amendment Agreement for Certain Silver Transactions, which addresses the winding down of the administration of the London Silver Fix by the London Silver Market Fixing Limited on August 14, 2014. Counterparties with outstanding contracts referencing the ‘SILVER-FIX’ can use the amendment agreement to replace that [reference to the “SILVER-FIX”] with a new commodity reference price, which may include a reference to the new London Silver Price, expected to be available from August 15, 2014.” [Bracketed text added by Adask.]
The first sentence in previous paragraph tells us that the ISDA is merely publishing a “form” that the two parties might agree to as an “amendment” to an existing silver derivative contract that heretofore relied on a price determination by the soon-to-be-defunct London Silver Fix.
Because the form is “bilateral” and an “agreement,” its use can’t be compelled. Use of this form is only recommended and depends on the mutual consent of all parties to the existing silver derivative. If any party to an existing silver derivative contract refuses to agree to the proposed amendment, the contract remains as is and will probably be voidable after August 14th.
The second sentence explains the purpose of the proposed amendment: to allow parties to an existing silver derivative contract to delete the original express references to the “SILVER-FIX” (“London Silver Fix”) and replace those references with a new “commodity reference price” that might be the forthcoming “London Silver Price”—but, by mutual agreement, could also be the Shanghai Gold Exchange, the Chicago Mercantile Exchange or any other mutually-agreed market or institution known to post a daily price for silver.
Note that, as of July 30th, the ISDA describes the “new London Silver Price” as being expected to be available from August 15, 2014.
Apparently, just sixteen days before the London Silver Fix will definitely expire, the ISDA only “expects” it to be replaced by the “new London Silver Price”. Thus, the ISDA implies that it’s not yet absolutely certain that the London Silver Price will actually be established on August 15th—or at any date thereafter.
Think about that.
It means that in just over two weeks before the London Silver Fix is scheduled to expire, there is not yet a definitely-known replacement.
How can it be that the London Silver Price is not yet a done deal—unless the whole “silver fix” process is in such a state of chaos that no agreement has yet been crafted? If chaos is already so prevalent, what are the chances that any entity chosen or created to replace the existing London Silver Fix will exert much authority or even last for more than a few months?
If the proposed London Silver Price entity is not yet a done deal, there’s no legal, moral or ethical obligation to subscribe to its price determinations on or after August 15th. For the moment, parties to existing silver derivatives can agree to reference any known institution or market for whatever price determination is required to set the price of silver on any given day.
More, parties to future derivatives can base their price determinations on any institution or market they mutually-agree to choose.
That tells me that the International Swaps and Derivative Association (ISDA) doesn’t give a damn about whichever market or institution is ultimately relied on to set the price in the existing (or future) silver derivatives—just so long as the newly-referenced market/institution is anything other than the soon-to-be-demised London Silver Fix.
That, in turn, implies that the International Swaps and Derivative Association isn’t interested in protecting the Gold Fix or the Silver Fix.
They’re interested in protecting derivatives.
I read the ISDA’s proposed form as evidence that the ISDA agrees with my contention that the loss of the London Silver Fix could cause some significant number of silver derivatives to become suddenly worthless.
The demise of the London Silver Fix is largely irrelevant.
Its replacement by the London Silver Price is largely irrelevant.
The primary issues are: 1) How many existing silver derivatives contracts will be rendered voidable after August 14th by closing the London Silver Fix?; and 2) What domino-like consequences might follow if enough silver derivatives are thereby rendered unenforceable and void?
• For now, God only knows how many silver derivatives must become worthless before the world’s paper-silver markets collapsed.
For now, God only knows how many silver derivatives must be declared worthless before they trigger a domino-like chain reaction that collapsed the world’s entire derivatives market—which some estimate to be valued at over $2 quadrillion.
But soon, we may all have a better idea of:
1) how many silver derivatives will be rendered worthless by the loss of the London Silver Fix; and,
2) how many worthless silver derivatives it takes to collapse the silver—or even global—derivatives markets.
How soon might we know?
Might be as soon as August 15th.
Beware the Ides of August.