One of the major players in the precious metals industry is largely closing up shop.
What does that mean for the rest of the markets?
Big banks have long played a crucial role in precious metals. They function as “market makers”, bringing together large-scale buyers and sellers so that true price discovery can take place.
These megabanks not only help market participants arrive at an accurate price, but they also provide the necessary liquidity to keep the wheels of trade properly greased.
However, these useful services were not always the focus of the banks’ interest in gold and silver bullion.
Investigations revealed that several Market Maker banks, such as Deutsche Bank and the Bank of Nova Scotia, were engaged in manipulating precious metals prices during the London fix.
This incident not only left a black eye on the fixing process, badly damaging its credibility, but is also leaving a mark on the ecosystem of the precious metals trade. In addition to giving up its seat on the fix, the Bank of Nova Scotia (better known as Scotiabank) is now looking to gradually reduce its presence in the industry altogether.
Exiting the Business
As a result of the fixing embarrassment, related litigation, and fines, Scotiabank decided it should unwind most its precious metals operations.
The ScotiaMocatta metals division at the company will be essentially cut in half as clients and business are sold off to other firms. Currently—prior to restructuring—the Mocatta subsidiary is the largest single lender in the global supply chain for precious metals, accounting for as much as one-fifth of all loans in the sector.
Overall, Scotiabank is among Canada’s biggest lenders, ranking third in the country in terms of market capitalization and deposits.
Reuters reported the news of Scotiabank’s restructuring plans this week. The whole process is expected to take about 18 months as the bank allows its clients to find alternative financing arrangements.
It’s not clear how this will impact the way gold and silver trade. Will it negatively effect trading volumes or liquidity? Like the case of the London fix, will another big bank simply step in to fill the void left by Scotiabank? Most importantly, will banks resist the temptation to manipulate prices in the future?
* * *
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.