Perhaps the clue to the argument should be in the name – the Gold Fix or Fixing – the daily meetings between the five bullion banks which set the London agreed gold price morning and afternoon, which much of the gold market uses as benchmark pricing. The silver price is ‘fixed’ similarly once per day.
One of the definitions of the word fix from the Oxford Dictionary is, “A dishonest or underhand arrangement”, and, while the London Gold Fix dates back to 1919, the word and this is perhaps a more modern interpretation of the word , it does thus have connotations which may in itself raise doubts about the financial integrity of the overall process.
Thus this ‘fixing’ mechanism has been coming under increased scrutiny, perhaps following on from the LIBOR scandal whereby benchmark interest rates had been manipulated in favour of some of the participants setting them. In the latest move regarding the London Gold Fixing which is already under regulatory investigation, a ‘class action’ lawsuit has been initiated in New York against the five member banks for manipulating the gold price through the fixing process. (The litigious U.S. legal system seems always quick to seize on potential opportunities for lawyers to rake in enormous fees!)
THE FIXING MECHANISM
A detailed description of the fixing process is available on the www.goldfixing.com website, but in very simple terms it works thus in a process which has been virtually unchanged for close on a Century:
Under the system the five member banks – currently Barclays, Deutsche Bank (which is in the process of relinquishing its position), HSBC, Societe Generale and Scotiabank – which, at the opening of the fixing sessions, held each day at 10.30 and 15.00 UK time, determine whether they have a selling or buying interest in gold, or no interest, with an opening price set by the Committee’s chairman, based primarily on the prevailing spot price. If no interest is forthcoming from the participating banks this becomes the price at which gold is fixed for the session.
If the buying or selling interest is 50 London good delivery bars or less the opening price may also be declared as the fixing price, however if there is buying or selling interest beyond this each of the participants then discloses how much gold they have available to buy or sell and the chairman’s opening price may be moved up or down until two-way interest is achieved at which point again the price is fixed.
The process has perhaps worked well for most of its life, although the manipulation theorists will suggest that there has always been a concerted move by the bullion banks to control the gold price rather than find a true equilibrium point. But it is probably the onset of High Frequency Trading that has primarily cast the process into doubt, with mere milliseconds in making a trade capable of leading to big potential gains or losses and the suggestion that this gives the fixing banks an opportunity to benefit which is not open to others.
The London Gold Fixing is thus something of an archaic system in this day and age dating back to the days when banking was seen as an honest and upright business (some of which it has lost in terms of reputation today) and probably does need updating in some way or another if such price benchmarks are to be set. Spot pricing is not ideal either as that is also prone to excessive contract sales or purchases via High Frequency Trading capable of moving pricing to an inordinate degree in a matter of seconds as we seem to have been seeing increasingly frequently of late. However, Mineweb does already use the 12 noon spot gold price as its own benchmark price as published in its daily Gold Newsletter (to subscribe free of charge click here) rather than the London morning gold fixing.
Now while the London gold fixing process is itself probably carried out with due integrity by the participating banks the possibility of subsequent trade manipulation behind the scenes cannot be ruled out, which is where regulators investigating the process are probably looking. A process where there are just five interested parties getting together to ‘fix’ the gold price is probably unlikely to be seen long term as a satisfactory mechanism and one suspects that the days of the London Gold Fixing may be numbered, at least in its current form – but what mechanism can be implemented to replace it remains uncertain.
Even so, the current fixing mechanism does have its strong supporters. Indeed, one such, Ross Norman of Sharps Pixley, who is perhaps better placed than most observers to comment given his years of experience in the sector in London, published a very strong defence of the process in an article yesterday which London Gold Fix sceptics should read.
The London Gold Fix controversy will undoubtedly rumble on – there are too many out there with their own axes to grind, and commercial interests to pursue for it to go away quickly. Likely the regulators investigating it will come up with some kind of recommendation which may lead to changes in the process – or maybe it should just change its name given some of the connotations of the word fix noted at the start of this article!