E The Fixing Fix

The London gold fixing by a twice-daily process of “price discovery” was almost 100 years old when two New York University Stern Biz School professors (one also a manager at Moody's, a rating agency) revealed to the world that the benchmark setting the price of the yellow metal was manipulated. This confirmed the long-term suspicions of gold bugs that the price was artificially lowered.

The fixing started in 1919 after World War I when the Rothschilds created a daily meeting to determine the daily price of gold in London. The first fixing was on Sept 12, 1919. This was at the height of South African gold shipments via London. Initially Rothschilds was the chairman of the fixing but it exited the gold business in 2004. Now there is a rotating chairman, currently fromScotiabank.

But the culprits blamed for collusion and fiddling with the fix by Profs. Rosa Abrantes-Metz and Albert Metz were not the central banks and various investment banks aiming to hide inflation. Their study of intra-day gold prices from 2001 to 2013 concluded that the afternoon gold price fixing was manipulated or fixed via collusion among the 5 banks in the London gold pool themselves. Their paper was published early this year and concluded that there was collusion in the setting of the London silver price as well.

The two Profs. Metz argued that “co-operation between participants may be occurring” between rounds. They also argued that “the emiprical data are consistent with price artificiality”. They concluded that large price manipulation was taking place in the afternoon fixing after 2004. A summary of their conclusions by Bloomberg reported a directional bias: “on days when the authors identified large price moves during the fix, they were downward at least two-thirds of the time in six different years between 2004 and 2013. In 2010, large moves during the fix were negative 92% of the time.”

However no one has yet proven that the gold price in fact was manipulated illegally. For that to happen the banks participating in the pool would have had to collude before they post their prices, which would expose them to price risk since they would not be able to set the quantity offered or bid for in advance. Yet the old system has become outdated and is being replaced with electronic trading without anyone being blamed or punished.

Under the old rules the participants would report how much they would buy or sell for clients or their own account based on variations from the prior fixing (of the morning or the day before). The idea is that if there is excess demand the price will be higher; and if there is insufficient demand it will be lower. The pool members are supposed to contact their clients or their trading desks as the price moves up or down to get updated bids and offers. While they are contacting clients the pool participants put up a flag which keeps the trading from concluding until they come back. When the successive buy and sell price volumes are under 50 gold bars apart, about 620 kilograms, the gold price is struck in US dollars for each troy ounce of gold delivered in London in the form of 400 oz bars. The prices are also issued in sterling and more recently in euros based on the US$ price.

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