Gold Fix dies in London, aged 100. Immediately gets up
& carries on...
THURSDAY 19 March will see the last ever
London Gold Fix, the 100-year old process for finding and publishing the
daily gold price, writes Adrian Ash at BullionVault.
Why, and what will replace it?
Here at BullionVault – the physical gold and silver
exchange for private investors – we ourselves are a regular customer of the
Gold Fix, buying or selling metal to re-stock or flatten the trading float we
use to meet customer demand 24/7 on our live bullion Order Board.
Our customers can, if they prefer, also buy or sell bullion at that daily price, paying just 0.5% fees
(Dollars) or 0.8% (Sterling or Euros).
So, while we hold no candle for London's big banks, we do
know something about how the Fix works and what it achieves. Here's our take
on why the Fix has lasted so long, why it is now ending, and why it will in
fact continue on Friday, simply updated to meet 21st century expectations and
assumptions outside the market.
First, what is the London Gold Fix?
The Gold Fix is a single price which matches the greatest
volume of buying and selling across the wholesale bullion market. Meeting
twice a day (10.30 and 3pm), the banks involved pool client business and pool
their resources to meet the net demand or supply which results.
The price identified is truly market-wide, because the
Fixing banks' customers also include other professional dealers, who have
already netted their own client orders. Hence the name. It finds the global
price like a ship takes a fix of its position.
Once the price is fixed and published, it is used to
execute orders between all clients and their dealers, whether or not they are
fixing members. Hence the London Fix's use as the gold price 'benchmark'
worldwide – the standard reference for pricing commercial deals and retail
products, and for valuations.
Gold is gold is gold the world over, a single element that
is no different wherever you own or trade it. (The professional wholesale
market trades gold content only. You never pay for any impurities whether a
bar is 995 or 999 parts per 1,000 fine.) But thanks to empire, vault
facilities, expertise and time zones, London has now dominated world gold
trading since the mid-18th century, and it remains the central storage and
dealing location today. Its twice-daily Gold Fix offers a unique moment of
deep liquidity, with demand and supply from traders across the world brought
together to find the single price which does the most business.
The London PM Gold Fix has been the world's daily
benchmark since at least 1919. Its sister, the Silver Fix, ran from 1897 to
2014. The Wall Street Journal reported an informal
Gold Fixing in 1907.
The biggest banks quoting London gold prices now trade $23
billion (£15bn) between them each day on average. Total trade is 3-5 times
that size. A huge part of that, if not the lion's shares, will be dealt at
the Fix price. Thanks solely to the ebb and flow of bullion from London's
vaults, precious metals feature every month in the UK's top 5 imports and top 5 exports by value. That's
remarkable for a nation with zero gold mining, no refining capacity and
next-to-no consumer demand.
Once published, the Fix acts as the basis for pricing many
commercial deals and retail products worldwide, as well as for valuing
holdings at central banks, ETF investment funds, and trade inventories.
Today's conference call involves four banks – Barclays,
HSBC, Societe Generale, and Scotia Mocatta (part of Canada's Scotiabank,
currently the chair). Run alongside other live markets (ie, 'spot' bullion
and derivatives), the Fixing opens with the chair proposing a US Dollar price
(the average of current spot quotes). Each of the four members then say
whether, at that price, they are a net buyer, net seller, or have "no
interest" (i.e., their own order book is already balanced).
If there's more gold offered than wanted between the four,
the chair lowers the price – and orders are resubmitted – to reduce supply
and boost demand (and vice versa). This is a rare example of
"tâtonnement" (literally "fumbling") in financial
markets, with the price tested by "trial and error" until supply
and demand are in balance.
Doesn't this let the Fixing members control the
price?
Tâtonnement pushes against manipulation. Because any
member wanting to, say, push the price up so they can sell unfairly high,
must in fact declare themselves a buyer, defeating their purpose. And short
of illegal collusion before the event (alleged in Manhattan law suits, but
not yet identified by any of the various regulatory investigations, such as
the FCA's 2014 report), each Fixing member only know their
own client orders, and only at the start of the process.
This is because the Fix is "leaky". The members'
direct customers can listen to what's happening, and bid for excess metal (or
offer what's needed) to balance the market. Crucially, they can also take
their business elsewhere if the suggested price becomes unattractive, again
helping balance supply and demand.
In the late 19th century, the Bank of England needed the
brokers it used to find a price for huge shipments of gold coming daily from
Australia and South Africa. Today the Fixing members undertake to accept
orders in any size, all dealt at that single market-wide price.
This is a valuable alternative to the 'spot' market, where
the price of large bullion bars is agreed only in a unique deal between one
buyer and one seller at a time. The huge volume of business done at the Fix
also adds great stability to a wider market increasingly led by derivatives
trading in futures and options.
So why is the Fix ending?
More than 7 in 10 respondents to market surveys in 2014 said they
were perfectly satisfied with the existing process. As a member of the
professional market, and a regular customer of the Fixes, BullionVault
certainly finds this 100-year old mechanism tried, tested, proven and very
useful.
But to outside observers, its longevity means the Fix must
be "past its sell-by date". There are also concerns over how the
process is managed (or not) by member banks. In May 2014 Barclays was fined £26m by the Financial Conduct Authority
for failing "to organise and control" its participation in the
process (most notably record-keeping and staff training), as well as failing
on one occasion to manage "conflicts of interest" with a client
betting the Fix would be set above a certain level – the "Plunkett
case".
The Fixing members are also being sued in a class action by a group of hedge funds and private
investors in New York for "manipulating" the benchmark – a suit
they believe to be groundless and plan to defend "vigourously". But
the US Department of Justice is also now running a criminal investigation of
10 or more bullion banks regarding the Fixings, and despite the CFTC
dismissing such allegations in 2003 and 2013, former commissioner Bart
Chilton in late-February repeated his 2010 claim that he found "repeated attempts to
deviously control" the Fixing prices, but had lacked enough evidence to meet the statutory burden of
proof.
Against all this, and knowing how important the London
gold market is to the City, and to the wider world, the Treasury has followed
a recommendation from the Fair & Effective Markets Review (run by the
Bank of England) to make misconduct in the Fixings a criminal offence, as it
is in the LIBOR interest-rate benchmark.
Thursday 19 March will see the last London Gold Fix,
ending as the Silver Fix ended in August last year. Like silver, gold's
market-wide price will still be determined by tâtonnement, with participant
dealers now aggregating their order books through an electronic platform from
Friday 20 March – the first LBMA Gold Price.
Named after (and owned by) the London Bullion Market
Association (of which BullionVault is a member, along with bullion banks,
wholesale dealers, and vault operators) this event will still be held twice a
day at 10.30 and 3pm London time. It continues the Fixing process of price
discovery, and will continue to involve the whole market, as smaller orders
(such as those from BullionVault users) are aggregated with orders to buy and
sell from across the market.
Instead of a telephone call and isolated record-keeping by
each member, the banks will report their net interest via an electronic
platform, provided and managed by specialists ICE Benchmark Administration.
Launched last August, the LBMA Silver Price also continues the previous
fixing process, but is administered by trading exchange the CME Group working
with data and news providers Thomson Reuters. It has been well-received by
users, such as BullionVault, to date. It has already broadened participation
in the 'fixing' auction from 3 banks under the old system to 6 companies
today – former members HSBC and Scotia Mocatta, as well J.P.Morgan, UBS,
Toronto Dominion Bank, and Japanese trading house Mitsui & Co. Precious
Metals Inc.
Friday's participants for the first LBMA Gold Price
haven't yet been announced. But as with silver, there's nothing but trading
appetite – and in-house compliance ready to meet regulatory requirements –
between Chinese or other Asian dealers joining the US, Canadian, Swiss and UK
banks likely to step up. After all, two Chinese banks – the giant ICBC and
also the China Construction Banking Corp. – are already Ordinary Members of
the LBMA. Their registered addresses are in Beijing.
In sum? The price of gold is a key indicator of confidence
in other assets, currencies, the economy and government policy. Gold is also
a huge market, turning over perhaps £75 billion per day.
Falling into place a century ago much as one Victorian
said Britain won its empire – "in a fit of absent-mindedness" – the twice-daily Gold
Fix has for a century offered a unique moment of deep liquidity, with demand
and supply from traders across the world brought together to find the single
price which does the most business.
Replacing this with new electronic systems and
record-keeping is quite an achievement inside the just 12 months. It also
brings the Fix in line with the latest and most stringent 'benchmark'
requirements, and should also help repair outside perceptions of London's
role in the market, damaged by association with other, unrelated financial benchmarks
and by the one known case of abuse at Barclays in 2012.
But it won't in fact change the underlying process of
price discovery. Nor should it. The fixing finds the market-wide price for
physical gold at that moment. If it's higher than you'd like, or lower, then
I think I can guess whether you're a buyer or a seller. You can always deal
principal-to-principal in a one-off deal at a one-off price with one dealer
instead. Or get price exposure, rather than gold itself, with an ETF. Or take
your leveraged chances with futures and options.
