(Updates with LBMA comment in 10th paragraph.)
June 18 (Bloomberg) -- The gold industry will discuss changes to the century-old gold fixing benchmark that’s used by mining companies to central banks to trade and value the metal.
Producers to refiners to exchanges are being invited by the World Gold Council to meet on July 7 in London to talk about reforming the rate set daily by four banks, the industry group said in a statement today. The U.K.’s Financial Conduct Authority, which has been visiting member banks involved in the fixing as part of its review of gold benchmarks, will attend as an observer, the council said.
The price-setting ritual dating back to 1919 takes place twice a day by phone between Societe Generale SA, Bank of Nova Scotia, HSBC Holdings Plc and Barclays Plc. A similar silver process will end in August when Deutsche Bank AG quits the daily meetings, and companies are due to make proposals this week for an alternative silver mechanism. The regulatory focus on financial benchmarks is intensifying after rigging was uncovered in everything from interbank lending rates to currencies.
“It is not surprising that it needs to change to meet today’s market expectations for enhanced regulation, transparency and technology,” Natalie Dempster, managing director, central banks and public policy at the council, said in the statement. “Modernization is imperative in order to maintain trust across the industry.”
The gold fixing takes place at 10:30 a.m. and 3 p.m. in London by phone, with the banks representing themselves and clients. The price is adjusted until the gold offered by either side is within 50 bars, or about 620 kilograms (1,433 pounds), at which point the fix is made. Traders relay the information to clients and take fresh orders as the price is adjusted during the fixing.
Traders say the process is efficient and a crucial reference point for the market, while economists and academics have said the gold fixing is susceptible to manipulation and lacks sufficient regulation. The FCA in May fined Barclays 26 million pounds ($44 million) after a trader sought to influence the gold fixing in 2012.
About $18 trillion of gold circulated globally last year, according to CPM Group, a New York-based research company. Gold was fixed at $1,269 an ounce in London this morning.
“It is not a surprise, given that the topic has been in the headlines for some time,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today by e-mail, referring to discussions on potential changes to the fixing. “The market is very large and liquid, it needs a fix.”
Deutsche Bank stopped taking part in gold fixings last month as part of the German lender’s exit from commodities. The London Silver Market Fixing Ltd. will stop running the silver process on Aug. 14 as Deutsche Bank’s planned withdrawal would leave just two banks to set that price. London Bullion Market Association members will hear firms’ proposals on June 20 for alternatives for the silver benchmark.
The LBMA is “happy to participate in discussions on issues which are designed to ensure the continued efficiency” of the gold and silver markets, Ruth Crowell, chief executive of the organization, said in an e-mailed statement today.
Spokesmen for HSBC, Societe Generale and Barclays declined to comment. Joe Konecny, a spokesman for Bank of Nova Scotia, didn’t immediately reply to a voice message or e-mail outside of Toronto business hours.
Guidelines for financial benchmarks designed to improve integrity and reliability in the wake of the Libor scandal were published by the International Organization of Securities Commissions last summer. The principles cover issues of governance and methodology, with one of the key recommendations the use of “observable transactions” as the basis of a benchmark.
The gold fixing could be reformed to bring it in line with the IOSCO principles or an alternative benchmark could be developed, the gold council’s Dempster said. A mechanism should be based on executed trades rather than submitted quotes, be tradeable and not just a reference price, while data should be transparent, published and subject to audit, the council said.
Whatever method is developed for silver won’t necessarily be appropriate for gold, partly because of differing user bases and supply chains for each metal, Dempster said in a phone interview today.
“Our objective in convening this forum is to ensure that the full range of analysis and market perspectives from all parts of the gold supply chain are debated, understood and brought to bear on any potential changes,” Dempster said. “Any reform or replacement of the fix must serve the needs of all market participants and meet today’s requirements for transparency, liquidity and independent oversight.”