In the last couple of weeks, we’ve noticed the
variance of the gold Fixing price and the open market price. In the past, the
two tended to dovetail giving the appearance of synchronicity. But in the
last week, open market prices have tried to take the gold price down only to
be pulled up by the price established at the London gold Fixing. There is a
structural change happening in the market, bringing the relevance of the
physical market to a far more important pricing role that it has had before.
As with other markets, it is the small amounts of gold sought after in the
open markets –to top-up unforeseen needs, as opposed to the amounts
directly contracted with suppliers that dictates the gold price. With these
alterations, that pattern is beginning to change. Why?
First we look at what the Gold Fixing is and why
it’s important, then at the speculative trading hedging gold/silver
markets on COMEX to see what influence they’re having on the precious
The London Gold Fixing
Above are the logos of the five member bullion banks that make up the
Gold Fixing at which around 90% of the world’s physical gold
transactions take place.
These are prime gold bullion banks,
globally. Their role in the Gold Fixing assures that because it’s at
this Fixing, that 90% of the world’s physical gold transactions are
transacted. The reason lies primarily with the processes involved that ensure
that these gold buyers and sellers achieve a price for gold that’s the
most accurate reflection of the current supply and demand for gold.
There are two Fixing sessions
–one in the morning at 10.30 hours GMT and then, to ensure inclusion of
U.S. participants, one at 15.00 hours GMT. In these, the five members used to sit
linked to their offices and looking at each other in a fairly small room,
each with a desk on which there is a flag. Now they are connected to each
other through a dedicated conference line, while also connected to their
clients, who are kept informed of the price as it’s moved in line with
the buying bids and selling offers.
At the start of each fixing, the
Chairman announces an opening price to the other 4 members who relay this
price to their customers, and based on orders received from them, instruct
their representatives to declare themselves as buyers or sellers at that
price. Provided there are both buyers and sellers at that price, members are
then asked to state the number of bars they wish to trade.
Bear in mind that each
member’s office is netting out the orders in the office and only
submitting the ‘net’ order to their dealer at the Fix. If at the
opening price, there are only buyers or only sellers, or if the numbers of
bars to be bought or sold does not balance, the price is moved, and the same
procedure is followed until a balance is achieved. The Chairman then
announces that the price is fixed. It should be noted that the Fix is said to
balance if the buy amount and the sell amount are within 50 bars [2000
ounces, 400 ounces each] of each other. The Fixing will last as long as
necessary to establish a price that satisfies both buyers and sellers.
Customers may leave orders in
advance of the Fixings. Alternatively, they may choose to be kept advised of
price changes throughout the Fixing and may alter their orders accordingly at
any time until the price is fixed.
To ensure that the price is not fixed before the member has had an opportunity
to communicate any changes each member has a “verbal” flag. As
long as any flag is raised, the Chairman may not declare the price fixed.
These negotiations go on for as long as it takes to reach a balance of demand
and supply. It appears that the longer the time taken to Fix the gold price,
the larger the amount of gold being dealt.
This ensures that every buyer or
seller of gold gets not only the best price at that time but also allows
large orders to be met without driving the gold price one way or the other by
dealers with limited amounts to supply or provide as is the case outside the
For instance, when the SPDR gold
Exchange Traded Fund buys gold for its shareholders, it buys through HSBC, a
gold Fixing member who holds it in its vaults for the shareholders.
This is how gold has a global but centralized market.
It may seem reasonable to you to assume that the
‘net’ position on COMEX would be covered by COMEX actually
ensuring that this amount of gold or silver is held in one of their four
COMEX-approved depositories, all located in New York City. After all,
delivery of the gold and silver is affected via electronic warrant. This
would reassure us that COMEX dealings did affect the gold or silver price,
would it not? After all, supposing someone went short and could not deliver
–who would supply the metals? The implications: COMEX is constantly
adjusting their gold & silver holdings to make sure that no-one would be
left without the metal they bought there. Not so!
warehouse stocks on a daily basis on its website: http://www.cmegroup.com/trading/energy/nymex-daily-reports.html
The COMEX gold and silver markets
are a futures and options market place where speculators and commercial
dealers buy or sell for future delivery of the metal. Originally, an ideal
market where both miners and manufacturers (via the Commercials) could remove
the risk of gold and silver prices from their physical positions—by
opening an opposite and equal futures or options position to their physical
one—it filled a secondary function of allowing speculators and traders
to make money through ‘open’ (not ‘hedged’, but
‘long’ or ‘short’ positions) from highly leveraged
positions. These players included major banks and small individuals.
The COMEX gold and silver market is
not a physical gold or silver market, except for approximately 1% - 5% of its
dealings. Even on those contracts, traders must first stipulate that they
will take delivery of the underlying metals so that the counterparty is aware
that they too are involved in a physical transaction. The balances of 95% of
the transactions are simply financial transactions that are usually closed
out before maturity, so that no physical delivery need take place.
COMEX Affects Gold, Silver Prices
The larger speculators, such as the
banks, may also be dealing in the physical metal –not simply to hedge
positions as is usual with the ‘commercials’ but to act in the
physical markets to move the price to make their COMEX positions profitable,
when they close their positions.
The large U.S. banks used to do
this on a large scale, but once they were challenged in public as
‘price manipulators’ they have retreated from these markets,
leaving individual and smaller speculators dominating the markets.
Consequently, the size of the gold
and silver COMEX markets has shrunk tremendously. There was a time when for
every $100 on the gold price, 100 tonnes of gold
was held in the ‘net long speculative position.’ Since the banks
have retreated from these markets, the ‘net long speculative
position’ has dropped to 649 tonnes [see this
drawn from the figures above] while the gold price is around $1,750.
The conclusion that can be drawn
from this is that the accompanying trades in the physical gold markets in
support of their COMEX positions has also lowered, reducing the impact of
large traders on the gold price.
With lower volumes involved in these markets and lower physical market
trades to support these positions, the trading market has thinned out,
whereas the physical market continues to grow. This is important, as it
reduces the extent and the size of traders in the precious metals markets,
allowing the physical market in these metals to increase their influence on
the gold and silver prices. It also makes market prices better reflect the
overall demand and supply patterns without the exaggerating influence of
Which is More
Important: London Fixing or COMEX?
With the entire futures and options markets shrinking
in size and influence and the presence of the large banks diminishing
drastically, COMEX influence, both directly and indirectly, on precious metal
prices, has shrunk. As the global gold and silver trade has expanded over the
last few years and promises far more expansion, the size of the London
physical gold market in London is growing steadily. In the future, expect to
see the Hong Kong physical gold market grow and perhaps see HSBC establish a
far eastern gold Fixing there to compliment the one in London, perhaps even
with the same member banks? As Chinese and Indian demand grows this would be
a logical step.