World Gold Council reviews London gold fix
The gold industry is responding to growing scrutiny over the cenutry-old method that determines the settling price of gold bullion. On June 18 the World Gold Council — a market development organization composed of top gold miners — announced that it was convening a cross-industry group to discuss the "modernisation of the London Gold Fix."
The process of gold fixing started in late 1919 and has since determined the price for settling contracts between members of the London bullion market, which indirectly influences the recognized rate that is used as a benchmark for pricing most gold products and derivatives globally.
The price-setting ritual occurs twice a day by phone between Societe Generale SA, Bank of Nova Scotia, HSBC Holdings Plc and Barclays Plc. Germany's Deutsche Bank stepped away from its seat at the table last month as part of a strategic move away from commodities.
Gold fixing takes place at 10:30 a.m. and 3 p.m. in London, with the participants serving as representatives of themselves and clients. The price is adjusted until the gold offered by either side is within 50 bars — or roughly 21,900 oz. — at which point the fix is settled. Traders relay information to clients and accept pertinent orders during the process.
Revelations surrounding the Libor (London Interbank Offered Rate) scandal last year, which revealed rate manipulations, have resulted in renewed regulatory attention on financial markets. Word leaked in late 2013 that both the U.K. Financial Conduct Authority (FCA) and U.S. Commodity Futures Trading Commission were taking a closer look at how gold prices are set.
In late May the FCA announced it was fining Barclays around US$44 million for breaching certain principles in the gold fixing process, namely its failure to: "manage certain conflicts of interest between itself and its customers; and to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems."
"It is not surprising that [the Fix] needs to change to meet today's market expectations and enhanced regulations, transparency and technology" commented Natalie Dempster, Managing Director, Central Banks and Public Policy at the World Gold Council. "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."
The World Gold Council consulted with a "number of industry participants" in order to identify five principles it believes should govern any reforms made to the gold fix system.
The recommended criteria for the benchmark state: it should be based on executed trades, rather than quote submissions; it should be a tradeable price, not simply a reference one; the input data should be highly transparent, published and subject to audit; it should be calculated from a deep and liquid market, through which a significant volume of gold flows are transacted; it should represent a physically-deliverable price, as many users want to take physical delivery of gold.
The first meeting is scheduled for July 7 in London with the FCA acting as an overseer. The participants will include representatives of bullion banks, refiners, exchange-traded funds (ETF) and other gold investment product sponsors, exchanges, industry bodies, central banks and mining companies. |
