Century-Old London Gold Benchmark Fix Said to Face Overhaul

Jan 21, 2014 12:37 pm ET

(Updates with other benchmark reviews in fifth paragraph.)

Jan. 21 (Bloomberg) -- Banks are considering an overhaul of London’s century-old gold benchmark used by miners, jewelers and central banks to buy, sell and value the precious metal, according to a person with knowledge of the process.

The five banks that oversee the so-called London gold fixing -- Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA -- have formed a steering committee that’s seeking external firms to advise how the process could be improved, according to the person, who asked not to be identified because the review isn’t public.

The fixing is a rate-setting ritual dating back to 1919. Representatives of the five member banks spend from a few minutes to more than an hour on the telephone discussing buying and selling gold. The method has faced scrutiny in recent months, with regulators in London, Bonn and Washington -- who are already looking into manipulation of interest rates and currencies -- investigating how prices are set in the market.

While investigators haven’t leveled any accusations that the gold fix is being manipulated, economists and academics have said the way the benchmark is set is outdated, vulnerable to abuse and lacking in direct regulatory oversight. Deutsche Bank, Germany’s largest lender, said in a statement last week it plans to withdraw from the panels for setting gold and silver fixings.

Discussions about the gold fix come as authorities grapple with a widening list of scandals involving the manipulation of benchmark financial rates, including the London interbank offered rate, or Libor, currencies and ISDAfix, which is used to determine the value of interest-rate derivatives.

Gold Bars

On conference calls at 10:30 a.m. and 3 p.m. London time, firms declare how many bars of gold they want to buy or sell at the current spot price, based on orders from clients as well as their own account. The price is increased or reduced until the buy and sell amounts are within 50 bars, or about 620 kilograms, of each other, at which point the fixing is agreed on. Traders relay shifts in supply and demand to clients during the calls and take fresh orders to buy or sell as the price changes, according to the website of London Gold Market Fixing Ltd., where results are published.

Bloomberg News reported in November concerns among traders and economists that the fixing banks and their clients had an unfair advantage because information gleaned from the calls provided an insight into the future direction of gold prices. Banks can bet on spot and derivatives markets for the metal throughout the call.

European Commission

The five banks that co-own London Gold Market Fixing, which administers and sets the rate, are considering how to improve the process before European Union legislation on financial benchmarks’ regulation and oversight comes into force, according to an adviser to the commission who asked not to be named. One option for the European Commission, the EU’s executive arm, would be to scrap the conference call and base the benchmark on an average of trades in the spot market over a short period, the person said. The legislation is currently before the European Parliament.

Germany’s financial markets regulator Bafin has interviewed Frankfurt-based Deutsche Bank employees as part of a probe into potential manipulation of gold and silver prices, Bloomberg reported in December. The U.K. Financial Conduct Authority is also scrutinizing how prices are set in the gold market. In private meetings last year, the Commodity Futures Trading Commission, which regulates derivatives in the U.S., discussed reviewing how gold prices are set, Bloomberg said in November.

Deutsche Bank

The people with knowledge of the probes who were cited in the stories wouldn’t say what’s being looked at or if regulators suspect wrongdoing. None of the regulators have opened formal probes into the matter.

Ila Kotecha, a spokeswoman at Societe Generale, and Vincent Domien, a precious metals trader at the lender and chairman of the London Gold fix, declined to comment. Douglas Beadle, a consultant to the London Gold Market Fixing company, referred calls to the Paris-based bank.

Nick Bone, a spokesman at Deutsche Bank, Aurelie Leonard of Barclays and Shani Halstead at London-based HSBC declined to comment. Joe Konecny, a spokesman for Toronto-based Bank of Nova Scotia, didn’t return voice messages left on his office and mobile phone, or reply to an e-mail seeking comment.

Deutsche Bank said last week it will withdraw from gold and silver fixings as it scales back its commodities business. It will continue in the fixings until a buyer for its seat is found, a person familiar with the plan said at the time.

Afternoon Gold

About $19.6 trillion of gold circulated globally in 2012, according to CPM Group, a New York-based research company. Bullion was fixed at $1,238 an ounce this afternoon. Gold for immediate delivery, which trades throughout the day, was at $1,241.26 as of 4:26 p.m. London time. Prices slumped 28 percent last year, the most since 1981, as some investors lost faith in the metal as a store of value.

The London Bullion Market Association said in November it’s reviewing its benchmarks to see whether they conform to guidelines set by the International Organization of Securities Commissions, including making prices based on “observable” deals where possible.

The LBMA oversees gold forward offered rates, which reflect bullion borrowing costs for different durations and are used in loan agreements. It has “no jurisdiction or responsibility” for the fixing process, Stewart Murray, its former chief executive officer, said last year.

--Editors: Heather Smith, David Scheer