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.
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.