Within the gold and silver community, there is no shortage of conspiracy theories, many of the tin hat variety. In April 2016, however, Deutsche Bank AG (NYSE: DB) admitted to participating in a large-scale manipulation of gold and silver markets that started in 2007. The potential for manipulation of the London gold and silver fixes had been a topic of conversation for decades, resulting from an archaic price-setting process, which was done behind closed doors by a handful of bank representatives. Generally speaking, these types of trades typically involve institutional-sized orders intended to capitalize on changes of a few pennies or less on futures contracts, meaning the impact on average investors is negligible. However, for institutional traders, consistent losses on manipulated trades can add up quickly.

Manipulation and Secret Auctions

The process of the London gold fix traces its roots back to the days following the end of World War I, as a group of five banks gathered for a daily auction at noon GMT to set the price of gold at the London offices of Nathan Mayer Rothschild & Sons. In 1968, a second gold auction was set for 3 p.m. GMT to fix the gold price for the opening of trading in the United States. The noon meeting was changed to 10:30 a.m. GMT. The silver fix was conducted in much the same way but traces its history back to the 19th century. Silver prices were fixed during a single daily auction at noon GMT.

In 2004, the gold fix meetings were replaced by conference calls with five participants: Barclays PLC (NYSE: BCS), Deutsche Bank AG, The Bank of Nova Scotia (NYSE: BNS), HSBC Holdings Plc (NYSE: HSBC) and Société Générale Group (OTC: SCGLY). Silver price fixes involved only Deutsche Bank, HSBC and The Bank of Nova Scotia. From the beginning, regardless of whether the auctions took place in face-to-face meetings or during conference calls, whatever transpired between the participating banks happened without oversight, and there was nothing to prevent front running trades and arbitrage tactics based on the information disclosed at the secretive auctions.

Deutsche Bank Settles

To settle the lawsuits filed against it, Deutsche Bank agreed to pay compensatory fines to separate settlement funds for gold and silver plaintiffs. Terms of the settlement were not disclosed. The bank also declared its intent to roll over against its co-conspirators, all of which have yet to settle the cases against them. As part of the settlement, Deutsche Bank must assist prosecutors’ pursuits of claims, including the provision of emails and instant messages relevant to the price-rigging schemes. In addition to the claims of manipulation filed against banks that participated directly, allegations of conspiring to exploit manipulated metals prices were also filed against UBS AG (NYSE: AG).

The Continuation of Manipulation

In 2015, Citigroup Inc. (NYSE: C), JPMorgan Chase & Co (NYSE: JPM), Barclays, UBS AG, The Royal Bank of Scotland Group plc (NYSE: RBS), and Bank of America Corporation (NYSE: BAC) were fined an aggregate of $6 billion for manipulating foreign currencies before and after daily price fixes. The strategy used by the banks to manipulate foreign currencies was similar to the gold and silver price fixing scheme, but instead of sharing information on pending trades through regularly scheduled conference calls, traders communicated through chat rooms. For example, if large buy orders from customers were coming in, traders ran prices higher prior to the fix, sold currencies to the customers and covered their short positions as prices settled lower after the fix.

Also in 2015, a group of 16 banks led by Deutsche Bank, Barclays, UBS, Rabobank and the Royal Bank of Scotland was found to have manipulated the London Interbank Offered Rate (LIBOR) for a period extending from 2003 to 2011. The scheme to manipulate the LIBOR rate, which serves as the benchmark for trillions of dollars in debt securities, enabled traders to generate returns on the sales or purchases of interest rate derivatives, such as credit default swaps, by adjusting the rate to maximize bank profits. The estimate for the total amount of fines for the 16 banks to settle the scheme is $35 billion.

Manipulation for Profit

In relative terms, the effects of gold, silver, foreign currency and the LIBOR rate manipulations are far more significant for the sponsoring banks and their institutional customers than for average investors, as the principle amounts of manipulated trades are generally quite large and price changes can be exceedingly small. Financial institutions on the wrong end of these trades, however, can accumulate substantial losses over time.

The unknown issue, which is a common thread in these three cases, is the relationship of levied fines to the levels of profit generated for the banks by each scheme. Considering the ongoing nature of manipulative practices, however, it is likely that banks are generating enough profits using illicit tactics to consider fines as a cost of doing business.