You only have to search the phrase ‘gold price manipulation’ on the internet to see that there is a massive amount of speculation on the matter out there. The same could be said for the silver market.
And now, according to the Wall Street Journal, it looks like the US Commodity Futures Trading Commission is taking an interest in how the spot price of gold is set. Although it seems that no definite statement has yet been made.
What seems to be at issue is the London Gold Fixing process that determines spot prices.
Although all precious metals are traded freely both on and off exchange and are therefore set by supply and demand there are price fixings for gold, silver, platinum and palladium every day.
The gold spot price is set twice a day by the five members of the London Gold Market Fixing at 10:30am and 3pm London time. Silver is set daily at midday by the three members of the London Silver Market Fixing. And the four members of the London Platinum and Palladium Market fix the prices of those metals at 9:45am and 2pm daily.
These prices are then used as the benchmark for contracts across the globe.
Looking at gold, the price fixings are not just a cosy chat between the five members; it is a price discovery method involving the clients of the five member banks.
When this procedure was first set up in 1919 the five major bullion traders met in the offices of N M Rothschild in London. But since 2004 this now takes place by telephone.
The group participants (see www.goldfixing.com) must be members of the London Bullion Market Association (LBMA) and are: Scotiabank, Barclays Capital, Deutsche Bank, HSBC and Societe Generale.
The price fixings are a type of auction where the price of gold is changed until the amounts of gold being bought and sold by the banks and their biggest clients are balanced and then the price is fixed.
To some this would seem to be a fair method of price discovery, to others a gateway for price manipulation.
But one has to ask is such a seemingly old fashioned procedure really needed in this 24 hour highly technical and globalised world? Is gold (or any other precious metal for that matter) so illiquid that its pricing needs this type of market maker help?
London Gold Fixing lists the benefits as:
– International benchmark
– Published price
– Narrow dealing spread
– Any quantity may be dealt
But could this be the successor to the Libor fixing scandal?