Gold Fixing Banks to Revamp Century-Old Pricing Process

Jul 16, 2014 8:21 pm ET

(Updates with academic’s comment in 13th paragraph.)

July 16 (Bloomberg) -- The banks conducting the century-old London gold fixing that’s used by miners and central banks to trade and value the metal are seeking to appoint an independent administrator in a revamp of the price-setting ritual.

The London Gold Market Fixing Ltd., which runs the procedure, said in a statement that the London Bullion Market Association will help with a request-for-proposals exercise for those wanting to run the fix, and that it’s seeking an independent chairman for the fixing firm. Deutsche Bank AG’s exit from the process this year as it scales back its commodities business left Societe Generale SA, Bank of Nova Scotia, HSBC Holdings Plc and Barclays Plc to conduct fixings.

The gold fixing takes place twice a day by phone. A similar ritual for silver will be replaced by an electronic, auction- based mechanism run by CME Group Inc. and Thomson Reuters Corp. next month after Deutsche Bank’s planned withdrawal would leave just two banks to conduct fixings for that commodity. Precious metals are getting more attention from regulators after price- rigging in everything from interbank lending rates to currencies led to fines and overhauled financial benchmarks.

“Perceptions of the fix have been tarnished,” Adrian Ash, head of research at BullionVault, an online service for investors to buy and sell physical gold and silver, said in an e-mail today. While the current process works well, “with the new London silver price process set to start on 15th August, it was only a matter of time before the gold fix moved to review and reform as well.”

Fixing Company

The gold fixing company, which runs the process for the banks, said it will also work with the U.K.’s Financial Conduct Authority and other stakeholders during the request-for- proposals exercise. Following a review, the fixing is “broadly aligned” with International Organization of Securities Commissions principles, the company said. A code of conduct for firms taking part in the fixing will be finalized soon, according to the e-mailed statement.

About $18 trillion of gold circulated globally last year, according to CPM Group, a New York-based research company. The metal was fixed at $1,301 an ounce in London this afternoon. Bullion for immediate delivery gained 8.3 percent this year, according to Bloomberg generic pricing.

During fixings, member banks declare how much metal they want to buy or sell for clients as well as their own accounts. Traders relay shifts in supply and demand to clients and take fresh orders as the spot price changes, before the fix is made. Participants can trade the metal and its derivatives on the over-the-counter market and exchanges during the calls. The process dates to 1919 for gold and 1897 for silver.

Silver Mechanism

The LBMA said last week that CME Group and Thomson Reuters will run the silver replacement from Aug. 15, after companies interested in running the replacement were invited to submit proposals. The London Silver Market Fixing Ltd. said in May it would stop running the benchmark that’s currently conducted by Deutsche Bank, HSBC Holdings and Bank of Nova Scotia.

The World Gold Council hosted a meeting on July 7 where 34 delegates including producers, refiners, central banks and exchanges discussed the gold benchmark. The industry wants an independent party to administer the rate as well as improved transparency, the council said.

“We have been saying for some time that the gold fix needs reform,” the London-based council said in an e-mail today. “Any move which improves transparency and governance, which also meets relevant international standards and reflects the needs of all market participants is to be welcomed.”

FCA Fine

While traders say fixings are efficient and a crucial reference point, economists and academics have said the process is susceptible to manipulation and lacks sufficient regulation. The FCA in May fined Barclays after a trader sought to influence the gold fix in 2012. The regulator has been visiting member banks involved in the gold fixing this year as part of its review of gold benchmarks, a person with knowledge of the matter said in April.

Gold fixings occur at 10:30 a.m. and 3 p.m. and the silver fix takes place at noon. They typically last about 10 minutes.

“It is based on actual trades amongst a select group, rather than being based on trades by all market participants,” Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, said today by phone. “The benchmark should be based on trades that are occurring for a longer period of time in the day. It should be based on trades that can be collected electronically and by anybody that’s traded during that time period.”

IOSCO Guidelines

Guidelines for financial benchmarks designed to improve integrity and reliability in the wake of the Libor scandal were published by IOSCO last year. 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.

While it’s possible that manipulation may have occurred, there’s “no clear evidence” of that during the gold fixing, David Bailey, director of financial markets infrastructure and supervision at the FCA, said at a U.K. Treasury Select Committee hearing in London on July 2.

Precious metals benchmarks have come under scrutiny after it emerged the London interbank offered rate, or Libor, was being manipulated and global investigations into foreign- exchange rigging started last year. Chancellor of the Exchequer George Osborne announced plans to extend criminal laws for benchmark manipulation to include foreign-exchange, fixed-income and commodity markets in June.

“It is important that the changes are not cosmetic and that there is real transparency in how the new gold fix price is derived,” Mark O’Byrne, a director in Dublin at brokerage GoldCore Ltd., said today by e-mail. “It’s important that the new price discovery mechanism is transparent and that there is regulatory oversight.” 

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