Andrew Critchlow: Don't waste time fixing gold fix -- it's obsolete


By Andrew Critchlow
The Telegraph, London
Monday, July 7, 2014

Does the system of fixing the daily price of gold in London really need fixing, or should it be allowed to fade into the annals of history?

Traders and market participants will gather today in London to debate the question which has hung over the City's precious metals market ever since it emerged this year that major abuses of the 100-year-old process known as the "London gold fix" had taken place.

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Although the event organised by the World Gold Council is unlikely to deliver an immediate solution to the problem of reforming the London fix, it is a starting point for the market to respond to concerns about endemic cheating.

"It is the first chance for users to have their say on the issue," Natalie Dempster, managing director for central banks and public policy at the World Gold Council, told The Daily Telegraph. “We will have a full and frank debate about what is right and what is wrong."

As the historic home of the gold fix, London plays a central role in the world's trade in precious metals. Around L220 billion of gold changes hands in the City daily, according to estimates.

According to Ms Dempster, the fixing system isn't all that bad and has served the market relatively well since it was devised in 1919. On the positive side it allows for a concentration of liquidity because the price benchmark is set at just two points in the day. It also has the added advantage of being based on actually executed trades, which provide a more accurate snapshot of the market than theoretical quotes.

Most central banks, such as the Bank of England, rely on the afternoon fix to put a price on their stock of gold bullion. Many retail outlets, such as coin dealers and gold jewellery manufacturers, also use the London gold fix to adjust their prices once a day.

On the downside, after 100 years of use the fix has become an anachronism, which lacks transparency and does not allow for sufficient oversight.

"The system has to be reformed one way or another," said Ms Dempster, who highlights that it will have to comply with the trading code set out by the International Organisation of Securities Commissions.

Alasdair Macleod, head of research for GoldMoney, an online brokerage, believes that the existing system has become "toxic" since Barclays was fined L26 million in May and one of its traders was banned from the City for failing to stop the manipulation of gold prices.

"Participants are now looking at the fix as something they don't want to be involved with," he told The Daily Telegraph.

Deutsche Bank gave up its seat in April on the panel of the five biggest bullion trading banks alongside Barclays, Bank of Nova Scotia, HSBC, and Societe Generale. It's unclear who will replace the German lender.

The London gold fix works by establishing the price at which the gross amount of gold placed on buy orders matches the gross amount of gold on sell orders across all of these participating banks.

However, the Barclays episode did succeed in blowing open the debate over whether the fix had become outdated. Prior to the 1980s, the fix played a role because it provided investors the only physical price but in today's 24-hour electronic trading cycle the fix has become redundant, with reliable pricing information available in real time.

"I don't think anything is needed to replace the fix because you now have a continual price visible around the world at any time. It is only in the last 20 years that there has been a visible price so in a way the fix has been redundant for some time," said Mr Macleod.

Although the City regulator has found no evidence that the London gold fix, originally introduced to revive the City's bullion market after the First World War, has been historically rigged, it is clear that the time has come for a change. Given the sensitivities surrounding trading following the Libor scandal the best solution may be to scrap it.

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