Something Weird Could Happen to the Prices of Gold and Silver on April 1, 2015

dollar pyramidHere’s an interesting development…

Starting early next year, London will begin regulating gold and silver prices through newly created oversight groups. Their aim? To “drive up standards” and “identify manipulative behavior.”

Sounds good in theory, but one must wonder about the implementation and unwanted side effects of another regulatory group.

It’s not all that hard to imagine a scenario where there are “official” and “unofficial” prices of gold and silver. The “unofficial” prices would, of course, be higher than those published by the regulatory bodies.

Here’s the announcement as reported by Kitco:

Britain’s financial regulatory body is moving forward with its plans to regulate gold and silver benchmarks.

The Financial Conduct Authority announced Monday that starting April 1, 2015, it will regulate a total of seven additional UK-based financial benchmarks in the fixed income, commodity and currency markets.

According to the FCA, the London Gold Fixing and the London Bullion Market Association Silver Price, will be two of the seven new regulated benchmarks.

The other markets include the Sterling Overnight Index Average, Repurchase Overnight Index Average, WM/Reuters London 4 p.m. Closing Spot Rate — the dominant global foreign exchange benchmark, ISDAFIX — the principal global benchmark for swap rates and spreads for interest rate swap transactions and the Intercontinental Exchange Brent Index — the crude oil benchmark in Europe.

The inclusion of the new regulated benchmarks is the result of the FCA’s initial regulation of the London Interbank Offered Rate, which was established in 2013.

“I am determined to ensure that markets work well and preserve the UK’s reputation as a centre of excellence for financial services – today’s announcement is a vital step in achieving this. This builds on our work to strengthen LIBOR, and drive up standards on benchmarks across the board,” said Martin Wheatley, chief executive of the FCA in the press release.

Under the new rules each benchmark administrator and firms that contribute to the benchmark will be FCA-authorized, and each firm will have to designate a senior manager to oversee compliance of the new benchmark requirements.

The FCA said that it will be embarking on a consultation process to Jan. 30 as it finalized all the rules that will govern the new benchmarks.

However, in the press release, the regulatory body said “key requirements include identifying potentially manipulative behaviour, controlling conflicts of interest and implementing robust governance and oversight arrangements.”

Increased scrutiny of financial markets, especially gold and silver, was heightened during 2014 as claims of market manipulation and lawsuits continued to resurface. Research in both gold and silver fixes released earlier in the year highlighted anomalies of price suppression during the fixing process.

In August the LBMA replaced the London Silver Market Fixing Ltd with its new, electronic based, LBMA Silver Price Fix, which is administered by the CME Group and Thomson Reuters.

In 2015, the London Gold Fixing Ltd will be replaced with the LBMA Gold Price, which will be operated by ICE Benchmark Administration.

Next year the association will have all the intellectual property prices for the precious metals benchmark as it will launch a new fixing process for both platinum and palladium, which will be operated by the London Metals Exchange.

Jessica Fung, commodity analyst at BMO Nesbitt, said that the new benchmark regulations could end up hurting the gold and silver market and “may push more players out of the market even after lower commodity prices have already seen a number of firms exit the commodities business.”