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Australia notices Deutsche Bank's agreement to settle gold, silver rigging claims

Section: Daily Dispatches

New York Court Investigates Claims Silver and Gold Prices Rigged

By Trevor Sykes
Australian Financial Review, Sydney
Monday, May 9, 2016

Silver and gold are looking strong again, partly because of interest rate movements but possibly also because of a court case being settled in New York.

The interest rate factor is clear. One of the arguments against holding precious metals has always been that they yield no interest. Now we are in an environment where government bonds and bank deposits yield very low interest anyway, so that argument has lost much of its strength.

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The court case, in the Southern District of New York, has so far been unreported in Australia. A group of plaintiffs sued Deutsche Bank, the Bank of Nova Scotia, HSBC, and their private company the London Silver Market Fixing Ltd for breaches of US anti-trust legislation. Another defendant was the Swiss-based UBS.

The plaintiffs alleged the banks rigged the silver market by publishing false prices. London Silver Fixing had run the daily silver auctions in London until August 2014, when the London Bullion Market Association (LBMA) took over the auctions.

Silver traders sued the banks and the company in 2014, alleging that the banks had abused their controlling position in the silver market to reap illegitimate profits from trading. They were alleged to have hurt traders who invested billions of dollars based on the benchmarks which were set by the banks.

UBS did not set the benchmarks, but was accused of conspiring to exploit the silver fix.

On April 13, Deutsche Bank shocked the market by unilaterally agreeing to settle. The amount it has agreed to pay remains undisclosed.

Deutsche Bank also agreed to cooperate with the plaintiffs by providing "instant messages and other electronic communications". Lawyers for the plaintiffs said the cooperation would "substantially assist plaintiffs in the prosecution of their claims against the non-settling defendants".

When one defendant in a lawsuit breaks ranks and settles, it normally puts great pressure on the other defendants to do the same.

It will also put pressure on the current LBMA silver auctions, because HSBC and the Bank of Nova Scotia are two of the five LBMA parties. Price manipulation in this market can be prosecuted criminally.

Whether such a prosecution is launched will depend on the regulator, Britain's Financial Conduct Authority (FCA).

More importantly, the allegations also extend to the gold market. A total of 96 plaintiffs are suing 22 defendants with claims that the gold market has been manipulated.

The defendants in the gold case are the Bank of Nova Scotia, Barclays, Deutsche Bank, HSBC, Societe Generale, UBS and The London Gold Market Fixing Ltd.

Again, it has been reported that Deutsche Bank is negotiating to unilaterally settle the claims. The repercussions from such a settlement are potentially huge.

Traders have suspected for years that the gold market was being rigged. The London fix and the Comex market in New York are the world's dominant gold markets, but prices are set in derivatives. In theory the daily London fix is supposed to be for physical delivery, but in practice trades are settled in cash and only rarely in gold.

In the physical markets, the big buyers for many years have been China, India and other Asian nations. The biggest gold hoard in the world is supposed to be in Fort Knox, but there is a strong suspicion that its holdings are much smaller than reported.

If that is so, the gold market is truly distorted because the price is being set in US and UK derivative markets and not by the physical market. If the US lawsuit extends into the heart of gold price fixing, the revelations could be explosive.

Silver peaked at $43 an ounce in April 2011. It went as low as $19 last January but has since recovered to $23. Gold went as low as $1351 an ounce in November 2011 and has recently been trading above $1,700.


Disclosure: Trevor Sykes holds shares in gold exploration companies. The author is not a licensed investment advisor. Views expressed are his own and not a substitute for tailored investment advice.

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