Move Over Libor, New Gold Market Manipulation Charges Raised

GoldGlobal_Intergold / Pixabay

On the heels interest rate and currency market rigging scandals, new charges that the benchmark used to set the price of gold used by miners, jewelers and central banks, known as the London gold fix, may have been manipulated by major banks for the past decade. 

Researcher who uncovered Libor scandal calls for gold manipulation investigation

Researchers Albert Metz, managing director at Moody’s Corporation (NYSE:MCO) Investors Service, and Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, are calling for an investigation of collusive behavior.  The primary issue stems from unusual trading patterns near the close of trading in London around 3 p.m. when the fix price is set on a conference call between the biggest gold dealers.

“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” the researchers say in the report, which hasn’t yet been submitted for publication but was reviewed by Bloomberg.  “It is likely that co-operation between participants may be occurring.” Abrantes-Metz’ 2008 white paper, “Libor Manipulation?” helped uncover the manipulation of the London interbank offered rate and she advises the European Union and the International Organization of Securities Commissions on financial benchmarks.

The five banks targeted in the paper include Barclays PLC (NYSE:BCS) (LON:BARC), Deutsche Bank AG (NYSE:DB) (ETR:DBK), The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS), HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) and Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE).  Trouble is no stranger to some of these banks.  For instance, HSBC had previously settled charges of money laundering for drug cartels and terrorists, Barclays had settled charges in market manipulation and Deutsche Bank had agreed to pay $1.9 billion to settle fraud charges related to the sale of mortgage-backed securities.

To draw their conclusions, the researchers examined intraday trading over a twelve year period, ending in 2013, looking for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes lower in spot gold prices during an afternoon gold fix call among those who set the rate.

Even with evidence, getting regulators to act sometimes difficult

“This is a first attempt to uncover potentially manipulative behavior and the results are concerning,” Abrantes-Metz was quoted as saying. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing. The results are consistent with the possibility of collusion.”

While providing strong evidence of market manipulation is one hurdle to cross, commodity market manipulation cases are not often brought by regulators.  CFTC Commissioner Bart Chilton, for instance, dug up e-mails, letters and had eyewitness testimony from traders and whistleblowers regarding silver manipulation, but the case was not perused, much to Chilton’s disappointment.  The potential exists for additional criminal evidence to emerge in the case.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

1 Comment on "Move Over Libor, New Gold Market Manipulation Charges Raised"

  1. this is not a RESEARCHER – it is someone trying to enrich themselves by kicking up a scandal by pandering to the delusional. There is a simple explanation to the observations :

    – why are there price spikes during the afternoon fix and not the morning fix ? – answer ; because the
    p.m. fix is when both London and New York are both open and as a buyer or seller you have a greater chance of getting a better price when liquidity is optimal – you would not for example get a good price when market participants are absent – makes sense. Got a big trade ? You trade when most others are available to take the other side of your trade. End of.

    – why are there large price moves during the time of the fixing ? answer : the fix is a price discovery process and as such large buying and selling orders collide here – large moves are therefore to be expected. In fact, the mere fact that it does move confirms some differences in opinion over fair value between the clients dealing in the fix – actually it supports the notion of the integrity of the process.

    – why is the move often down and not up ? answer : the fix is used by official institutions (like central banks) and many major miners who all require an “objective” and published price because they need to more accountable than say a proprietary trader. The spot price for example is neither of objective nor published. Selling by miners in size every day and invariably outweighs any official buying which is typically large but infrequent. Hedging or
    financing for the miners have will often link their financial arrangements to the gold fix.

    – why is the fix done on a private call amongst members ? – answer : it’s not private, it is an open call. Clients dealing on the fix can and do change their orders – or indeed cancel them during the process. This is fundamental and fixing members will not know their own client orders in advance of the fixing process – let alone clients orders done through other fixing members.

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