Gold News Monitor originally sent
to subscribers on March 4, 2015, 7:16 AM.
While we are waiting for the details on the ECB’s QE
(will be published on Thursday) and the U.S. non-farm payroll report (will be
revealed on Friday), it is worth analyzing a piece of news which passed
almost unnoticed. The long established London Gold Fix is going to be
replaced by the new electronic LBMA price-discovery process on March 20th
this year. Why do we believe that all gold investors should be aware of that
fact?
When we first read about the coming end of the London
Gold Fix, we could not believe. It is (still) the most important global
benchmark for gold prices in the world, being in operation since 1919. We do
not know whether the approaching launch of the new gold pricing mechanism
will be a genuine game-changer, but it definitely means something.
What is this all about? In short, the gold benchmark will
be set via an electronic platform managed by the ICE Benchmark
Administration. According to the official statement:
“IBA will operate a physically settled, electronic and
tradeable auction process. The price formation will be in dollars and prices
will continue to be set twice daily at 10:30 and 15:00 (London time) in three
currencies: USD, EUR and GBP. Within the process, aggregated gold bids and
offers will be updated in real-time with the imbalance calculated and the
price updated every 30 seconds until the buy and sell orders are matched.
Participants, as well as sponsored clients, will be able to manage their
orders in the auction in real time via their desktops.”
It means that the London gold price will be no longer set
through a private arrangement (conference calls twice a day) among just four
members of London Gold Market Fixing Ltd. (at present, Bank of Nova
Scotia-ScotiaMocatta, Barclays Bank PLC, HSBC Bank U.S.A., and Société
Générale SA).
What are the possible consequences of this replacement
for the gold market? First, it should bring more transparency to the market.
We are not claiming that banks used to meddle with the gold market, however
the change is coming after a big investigation into a number of global
benchmarks set behind the closed doors, like the rigged Libor.
Second, more participants will be involved into setting
the benchmark price of gold. Probably 11 entities will provide the data used
to establish the daily gold price. More participants should provide larger transparency.
The more players, the harder to collude to set the price.
Third, the new gold price mechanism may be positive for
the gold prices. Why? A few Chinese banks (three of them are already LBMA
members) are likely to participate in setting the gold prices. It means that
Chinese clients will have a more direct influence on the international price
of gold. This is important, because the Chinese are considered to be more
bullish on gold. It is an open secret that the gold prices trade on average at higher
price levels during the Asian trading hours than during the London and New
York trading hours.
The key takeaway is that the new gold price mechanism is
going to be launched on March 20th and it should bring more transparency to
the market. It may also strengthen the gold prices. It will rather not cause
a parabolic spike in the gold prices, however it may provide a long-term
support by ensuring larger transparency and stability and, thus, attracting
more value-oriented clients to the gold market.
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Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
