A month ago we looked at an archaic part of the gold investment market – the London Gold Fix - and outlined what it was and asked if it even mattered anymore.
A huge amount of attention has been placed on the 100 year old process in recent months, as regulators around the West begin to question its legitimacy. As we explained last month, BaFin, the CFTC and the FCA, have each purportedly taken a look at the gold price fix and just how much ‘fixing’ is going on.
Following (rumoured) intense scrutiny into their involvement in the London Gold Fix, Deutsche Bank recently announced that they were looking to sell their seat at the prestigious table. This came as part of an ongoing process by the bank to remove themselves from the commodity markets.
We questioned, back in January, whether or not anyone would even want the seat given the scrutiny the entire process is currently facing.
We also raised the issue of China’s concerns that the gold price setting mechanism was not transparent enough and would be pushing for gold price discovery to become something that they too could be a part of.
Enter a big new player
But, as they say if you can’t beat ‘em, join ‘em. And that is precisely what the Chinese plan to do.
Last week Standard Bank emerged as the potential buyer of Deutsche Bank’s seat. Whilst Standard Bank maybe South African owned, it is in the process of selling its UK-based markets division to Industrial and Commercial Bank of China.
Given China’s growing prominence in the gold buying market it is unsurprising that ICBC are looking to use their investment in Standard Bank as a means of getting to the centre of the gold market. The Chinese bank has a huge retail business, involving millions of clients. China’s entire gold investing demand grew by 32% in 2013, with little sign of let up.
A London-based banking source told the FT, ‘ICBC wants to become a gold market-maker and joining the fix through Standard Bank makes it easier for the industry to digest.’
Koos Jansen recently published a fantastic interview from ICBC’s head of precious metals. The interview clearly shows the bank’s intentions to advance its stance in the precious metals space. Jansen writes, ‘In 2013, ICBC physical gold sales increased by more than 80% YoY, the growth rate of the entire line of business also grew more than 30% over the previous year.’
The effect of China
What will the arrival of one of the world’s largest gold market participants mean to the London Fix? Will this be end of manipulation of gold prices or perhaps we’ve seen nothing yet.
Whatever happens, there is clearly no doubt anymore that manipulation and collusion is going on around that cosy table.
This morning the FT has reported on some research from the consultancy Fideres that suggests ‘collusive behaviour’ amongst the five price-setting banks.
According to the report there is evidence that the gold price falls/climbs as the conference call between the fix members takes place and then ‘peaks (or troughs) almost exactly as the call ends and then experiences a sharp reversal.’ The action of the gold price in 50% of the cases looked at by the consultancy was said to be ‘suspicious.’
To remind those of you who are not familiar with the process of the London Gold Fix, it is a process that involves five banks: Barclays, Deutsche Bank, Bank of Nova Scotia, HSBC Holdings and Societe Generale, the Fix occurs twice a day; 10 am and 3pm, London time.
Fideres conclude that the price action mentioned above, ‘is indicative of panel banks pushing the gold price upwards on the basis of a strategy that was likely predetermined before the start of the call in order to benefit their existing positions or pending orders.’
Fideres’ findings will merely add to the pressure currently on the UK FCA, the US CFTC and Germany’s BaFin, all of whom have had some level (some official, some rumoured) of look at the gold fix.
We say watch this space. Whilst many gold market participants, particularly in physical gold, will be pushing for the end of the gold fix, we believe the arrival of the Chinese at the table is a welcome step indeed.
For a country that so clearly wishes to grab as much physical gold as possible, how the Chinese treat the issue of gold price discovery will continue to be on the minds of global gold investors.
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