After Libor, Euribor, Cibor and oil price fixing, regulators have opened scrutiny into gold price fixing, report Liam Vaughan, Nicholas Larkin & Suzi Ring of Bloomberg. The U.K. Financial Conduct Authority has been scrutinizing the way prices in the $20 billion gold market are fixed. The gold prices fixed in London are used as a benchmark by central banks, jewelers and mining firms to buy and sell the yellow metal.
How certain traders benefit from the gold price fixing process
Since September 1919, representatives of five major banks including Deutsche Bank AG (NYSE:DB), Barclays Plc (NYSE:BCS) (LON:BARC), HSBC Holdings Plc (NYSE:HSBC) (LON:HSBA) (HKG:0005), Societe Generale SA (EPA:GLE) (OTCMKTS:SCGLY) and Bank of Nova Scotia (NYSE:BNS) (TSE:BNS) meet to fix the gold price every day. Using this process, gold prices are fixed twice a day, at 10:30 AM and 3:00 PM local time. Experts say traders who gain knowledge from the meeting or telephone calls of five banks get an unfair advantage while trading the yellow metal. Such traders and their clients may use the information from the meeting to bet accordingly. In a market where even milliseconds could prove to be advantageous, a few minutes of advance knowledge may allow certain traders to buy or sell with a high degree of certainty.
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The process of fixing gold prices could take anywhere between a few minutes to hours. During the call between five banks, the chairman of the group proposes a dollar figure per ounce of gold that is close to the latest spot price. Then the banks reveal how many bars of gold they would like to buy or sell at the proposed price based on orders from their clients. If the demand is more than supply, the chairman increases the price, and the process starts all over again. The process continues until the demand and supply are within 50 bars of each other.
No evidence of gold rate-rigging so far
So far, there is no evidence that gold dealers came together to manipulate prices like Libor. But economists say the method of determining the London fix is outdated. It lacks a direct regulatory oversight, and is vulnerable to abuse. Sources familiar with the matter told Bloomberg that the U.S. Commodity Futures Trading Commission discussed, in a private meeting, plans to review the method of gold price fixing. The Financial Conduct Authority scrutiny is preliminary, rather than a formal investigation.
London is the world’s largest center of gold trading. In 2012, more than $33 billion worth of yellow metal changed hands every day in the U.K. capital.