Perhaps we were too quick to pass over the world gold fixing stories and manipulations recently. Reading this banking article from the 1990s is a good lead-in for our strong suspicions that manipulations will go on as usual business in China.
Certainly this one from Forbes warrants more investigation that exceeds by light years any sleuthing acumen we may have. We'd expect one of the super gold 'investigative journalists' has already connected the dots.
Here's the Rothschild schematic of business governance.
The Rothschild Group withdrew from London gold fixing in 2004:Rothschild to pull out of gold market after 200 years
China Seeks Seat On Gold Fix Table. What Does It Mean For The Gold Price?
“…Delivery ratios [in China] reflect delivery of actual physical gold, rather than just contracts changing hands. In China, delivery ratios are commonly 30 to 40%, yet rarely exceed 5% on Comex, for example.”
2/20/2014
Chris Wright
This week reports emerged that South Africa’s Standard Bank was in negotiations to take Deutsche Bank’s seat at something known as the London fix: the group of banks who chair the price-setting mechanism for the global gold benchmark. On first glance it looked interesting and perhaps practical that South Africa, as a leading gold producer, should seek a seat at this particular table. But that is to miss the point. What is much more interesting is that Standard Bank is 20% owned by China’s Industrial and Commercial Bank of China (ICBC) – which is also in the process of buying a majority stake in Standard’s UK-based markets business, including commodities.
To understand the significance of this step, let’s take a look at the various elements of the story.
Firstly, what’s the gold fix? It is not as nefarious as it sounds, and the word ‘fix’ is somewhat unfortunate in an era of Libor and FX fixing scandals (which perhaps partly explains why Deutsche wants out – German regulators are investigating precious metals price setting and Deutsche is withdrawing from commodity markets anyway). Five banks determine the gold price between them, conducting conference calls twice a day, at 10.30am and 3.30pm London time. Today, those banks are HSBC, Barclays, SG, Bank of Nova Scotia and Deutsche. None of them were among the five founders who began the fix in 1919; the last of those, N M Rothschild, sold to Barclays 10 years ago.
Seats on this board are considered highly prestigious, though they don’t bring in much revenue in themselves. The problem is, ever since regulators started looking closely at manipulation of financial benchmarks – Libor being the most obvious example – it no longer looks so good to be a part of a handful of banks controlling something as vital as the gold price.
Next, what would China want with such a seat? Well, that’s another interesting story. The Shanghai Gold Exchange is not yet a driver of the global gold price, but is becoming steadily more significant in the world gold market. Yet gold behaves differently in China to elsewhere in the world. Delivery ratios are much higher in China than in other world markets. Delivery ratios reflect delivery of actual physical gold, rather than just contracts changing hands. In China, delivery ratios are commonly 30 to 40%, yet rarely exceed 5% on Comex, for example. There was a moment, in April 2013, when SGE deliveries overtook mining production.
So while trading in Shanghai is not yet enough to make a big difference to the global gold price, it is sufficient to drive distinctions between the paper and physical gold markets, which can behave differently from one another. On top of that, China has considerable gold reserves: they stood at 33.89 million fine troy ounces, or 1,054 tonnes, at the end of 2013. When one considers that, it’s entirely reasonable that a Chinese institution should seek a seat at the gold price table.
So why wouldn’t ICBC, or another Chinese bank like Bank of China or China Commercial Bank, just go and buy directly from a western bank? Well, maybe selling to Standard Bank is a little more palatable than a sale straight to a Chinese state-owned behemoth.
The next question is what difference this all makes to the gold price. In truth, a role among the fixing members doesn’t confer an enormous amount of power; the gold fix needs to reflect the prevailing dollar spot price, and is subject to rules testing buying and selling interest in the price. No individual member of the five can exert any more influence than the others. Collusion among them is theoretically possible but, with renewed scrutiny of financial benchmarks, is probably less likely now than ever.
So ICBC won’t change the gold price – or not just because it buys this seat. China, though? China is already supporting the gold price through central bank reserves, individual consumption and a love of the physical metal as much as its investment potential. China’s role in gold is only going to grow, and a role in the twice-daily fix is merely an accurate reflection of an existing reality.
