Market regulations, public protection

You know the grim smile that comes to your face when you hear the chilling words, “I’m from the government and I’m here to help you.”

Well, because of the great wealth produced by world metals output, there have been attempts by a small number of persons during the last hundred years to end-run the system and manipulate prices to their private advantage. They have always failed in the longer term.

However, these rare cases have resulted each time in obliging governments to intervene with increasing supervision and stricter rules to ensure fairness in trading. Fortunately, the metals price markets still remain largely self-regulated, but with the state always hovering near.

The main output or product of an organized metal commodity market or exchange in the free world is the price of one or more primary metals. These world prices have a great influence on the economic welfare of Canada, the U.S. and certain other countries and therefore their sources merit study.

It is extremely important that people in resource-dependent communities, mine employees and key leaders in all arms of government understand how the system works and it is desirable they have regular access to informed opinion on the price trends to be expected. Two types of markets

Stock markets trade shares to you promptly and you usually pay promptly. However, most commodity exchanges, including most metal markets, deal with the future, operating on the trading of promises to deliver or receive an amount of a commodity on an agreed future date and at the agreed price. This fundamental difference between the two types of market naturally makes for variations in function, administration and regulations.

There is no greater question for both types of pricing exchanges than good faith — that of the traders and customers, including mines and refineries — with the sustained ability of each member of an exchange to deliver on promises and pay on the due date. It is also a fact that a sizeable proportion of metals trading, involving, for example, millions of dollars a week, is done by word of mouth, often evidenced in law by “chicken scratches.”

In North America, although satisfying the Canadian government supervisor at the Winnipeg Commodity Exchange, or the U.S. Commodity Futures Trading Commission represents an extra cost of doing business, few metals people involved would argue against the vital need to be fair and honest and (much more importantly) to be actually seen and perceived to be doing both publicly under the “open outcry” process, published to the world. Instant price relay

There is instantaneous electronic publication to the world of each trade and its price by the metal exchange, making for what is called “market transparency,” an above- board picture, Bristol fashion. The process is described as “price discovery.”

The prices thus recorded are closely studied by metals refineries, consumers of metals, planners, miners, etc. who then make buying or selling decisions. Even though mines would always prefer higher prices and consumers lower ones, they must have full confidence the prices they act on are reliable and not rigged.

Each metal exchange in North America is backed by a financial “clearing house” which takes action to firmly guarantee no customer suffers financial damage from the rare unilateral default on a contract on the exchange. North American metal exchanges are “not-for- profit” membership organizations.

All kinds of protection for individuals from unfair practices are now built into rules in the U.K., Switzerland, Japan, etc., governing activity on free enterprise metal exchanges.

Integrity is the hallmark of prices emanating from the unincorporated “honor system” style of the London and Zurich bullion markets, which are respected indicators of prices. They trade millions of dollars of actual physical gold per day for prompt delivery. The London Metal Exchange operates on a muted “open outcry” system with base metals and silver, but they are partly future prices.

In this area of exchanges at least, it does appear the government really is in there, helping you. T. P. (Tom) Mohide, a former president of the Winnipeg Commodity Exchange, served as director of mineral resources with the Ontario Ministry of Natural Resources prior to his retirement in 1986. This column is the third in a series on “How metal prices are made.”