Pressure to reform the London gold fix has been mounting, but a group of 34 delegates representing different parts of the gold industry (mining operations, refiners, exchanges, investors) organized by the World Gold Council (WGC) is opposed to a complete overhaul of the current system..
“There was no real view from anyone in the room that the gold fix should be abandoned and we should start redesigning it from scratch,” said WGC managing director Natalie Dempster, Reuters reports. “There was a very clear consensus that users want reform not replacement.”
Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
Antiquated gold fix is outdated, easily abused
Under the current system, just shy of a century old, representative from Barclays PLC (ADR) (NYSE:BCS) (LON:BARC), HSBC Holdings plc (ADR) (NYSE:HSBC), The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS), and Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE) (Deutsche Bank resigned its seat earlier this year) have a conference call twice a day where the chair proposes a price and then the bank representatives say how much they would buy or sell at the proposed price. If demand exceeds supply the price is raised and the process repeats, and if supply exceeds demand it’s reduced. When supply and demand are within 50 bars, the price is fixed and communicated to everyone else.
With so few people directly involved, and the time delays in transmitting information to actors outside the privileged banks setting the price, the system has been criticized as outdated and prone to abuse. Barclays PLC (ADR) (NYSE:BCS) (LON:BARC), was fined $44 million by the UK’s Financial Conduct Authority earlier this year in a case similar to the LIBOR pricing scandal and other regulators continue to investigate the gold fix.
Banks didn’t attend, but WGC says it has met with them
There was agreement at the WGC that the process should be more transparent, and that it should be based on publicly available inputs. None of the banks involved in the London gold fix were at the WGC meeting, but the WGC says that it is in contact with all of them. The WGC doesn’t have the authority to insist on changes, but it is an influential group within the gold sector.
The London silver fix, which is going to be eliminated on August 14, is going to be replaced by the Chicago Mercantile Exchange and Thomson Reuters, and if the switch goes off without any serious problems it could be a model for changing the gold fix down the road.