When London’s Gold Fix Goes Away, Does It Really Need a Replacement?

by on
Gold Prices Going Up

The World Gold Council got together last week to discuss whether the daily London Gold Fix system, that has been in place for a hundred years, needs changing. Arguments came from both sides.

FREE Download: The Monthly MMI® Report – covering the Precious markets.

There are those that are perfectly happy with the way it works at present saying the system, while old-fashioned, has served the market well and can continue to do so in the future. They argue the price is a real measure of a fair balance between buy and sell as the prices are bid up or down in response to actual market buy and sell orders. The concentration of liquidity into the daily fix also ensures, supporters say, an accurate price and a fair benchmark for much of the £220 billion ($375 billion) of gold that changes hands every day in the city of London.

Others, however, would like to see the system amended and modernized. They argue it is not transparent enough, that execution and administration should be separated, and, in any case, the system will have to be improved to comply with the trading code set out by the International Organization of Securities Commissions. In May Barclays was fined £26m ($44 million) for failing to stop the manipulation of gold prices. This was not unconnected with Deutsche Bank’s decision to exit the Gold fix the month before in the face of increasing regulatory scrutiny.

A Gold Investing News article lists three objectives the World Gold Council would like to see incorporated as part of the review:

  • The process of fixing the gold price should be expanded “to reflect the full range of market participants.”
  • The fix should continue to be based in London to “reflect both the deep pool of liquidity available in London, as well as London’s historic and current position as the primary trading center for gold.”
  • The benchmark should be transparent in order to mitigate “any potential reputational risk for those administering” it.

Well that all makes fine sense, but we would raise another question:

Do we need the gold fix at all?

In today’s electronic world, gold trading is going on somewhere literally all of the time. Is not reliable trading data being generated at least during the working day of the major gold trading centers of Shanghai, Dubai, Zurich, London and New York/Chicago? Not to mention Mumbai, Hong Kong and others?

London, alone, will continue to transact over £200 billion in gold deals daily, probably in large part across the desks of the same banks that are today members of the current gold fix. The biggest issue is putting an alternative reporting platform in place before the current system expires next month. We rather like the idea of tradition and maintaining historical practices, but only if they remain the most efficient method of setting prices or doing business…  which the gold fix, in its current form, certainly is not.

Comment (1)

  1. ross norman says:

    I liked the question in your headline – but I am not sure you really ended up answering it. The gold market is not unique in having a benchmark price – almost all commodities do but often by different names – and there is a reason for this.

    There are literally thousands of contracts between institutional investors, gold refineries, miners to name a handful that need a reference price against which a deal is done which defines “the gold price”.

    Normal intraday spot trading is unreliable as a benchmark because it is highly subjective (the prices are derived from individual banks) and they do represent deals “traded at…” – they are more like advertisements and therefore unsuitable. They also give no indication of the volume that could be traded at that price.

    It is tempting to assume that a highly automated and technical solution would be the fairest and least open to corruption than say one involving humans. Sadly this thinking is errant because machines can read your intentions (think algo trades which can front run your orders).

    For sure there are improvements that need to be made to improve the London fix around good governance and transparency – but it is worth remembering that the fix gives institutional investors and the like (who all it could be said are market experts) greater transparency (by way of fixing commentaries) and greater protection (you can amend or cancel your order at ANY point) than you might find in more traditional (think art) auctions or even ebay.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.