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 Yet the old system has become outdated and is being replaced with electronic trading without anyone being blamed or punished.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.

The time it takes varies between ten minutes and (in a crisis) several hours. The London Gold Market was closed in 1939 and reopened only in the spring of 1954.

Now the century-old system whereby 5 gold dealing banks (all members of the separate London Bullion Market Association which later publishes the fixing price) all members of the London Gold Market Fixing Ltd group report about what they or their clients are willing to pay for gold is being ended. An electronic platform will be set up by the surviving gold fixing entities, Britain's Barclays and HSBC, French SocGen, and Canadian ScotiaBank in the lead. The 5th bank, Sharps Pixley, owned by Deutsche Bank, has removed itself from the operation and its reform. The move to a more transparent and verifiable system is needed to meet new regulations among other things from the European Union which sought advise from Prof. Albert Metz.

The quartet are also looking for a new independent third-party administrator of the electronic system. Meanwhile ThomsonReuters and the Chicago Metal Exchange have taken over the matter of setting electronically the daily silver price.

More follows from Sweden, Britain, Holland, Singapore, China, Canada, Mexico, Portugal, Brazil, Ireland, and Israel.

*GlaxoSmithKline was already involved in bribery in China in 2001, to sell vaccines, it has now been revealed, under its former management. The story was broken by The Financial Times which learned of an in-house crackdown at the time carried out by PwC, its auditors. AT that time the current CEO, Sr Andrew Witty, was head of Asia Pacific at GSK but his responsibilities did not include China.

China will open its courtroom to foreign observers to protect the American and British couple accused to violating Chinese privacy rules and other laws to find the whistle-blower in the 2013 bribery accusations against GSK. Some of the sacked Chinese salesmen ousted after the 2013 scandal are suing GSK in Chinese courts to get back the bribes they laid out and also collect compensation for illegal dismissal.

Its treatment for melanoma, combined Mekinist and Tafinlar, was stopped early in phase III trials against another treatment (vemurafenib) and the trials were stopped so all patients could be given the combo of trametinib and dabrafenib. Melanoma is a deadly cancer and the trials showed strong overall survivor benefits.

*Portugal Telecom and Oi appear to near an accord on what to do with the euros 847 mn in defaulted debt the Espirito Santo Group owes PT. At midnight Tuesday-Wednesday night, ESG sub Rioforte of Luxembourg formally defaulted on its commercial paper debt to PT. PT has now agreed to buy the debt back in exchange for ceding Oi shares worth 16.6% of the Brazilian telco's total capital. PT will get an option to buy back the Oi shares over the next 6 years which Fitch Ratingsthinks means the Oi-PT merger will succeed. Fitch also downrated the debt of PT and Oi. PT with Oi will pursue legal and procedural measures agaisnt Rioforte and related parties to get their money back. Rioforte Investments SA is the main union of Espirito Santo International, both of Luxembourg. After rising for a few days, PT shares are down over 5% today in Lisbon trading at euros 1.793 now (near the close).

*Tangentially to all the Murdoch machinations, Liberty Media has bought most of the remaining stake British Sky Broadcasting owns in ITV plc, 6.4% for which John Malone's firm paid GBP 481 mn or $824 mn. It will not bid for the rest of ITV yet but it is now a player in UK free-to-air channels alongside cable.

The Murdoch then-heir, James, bought the ITV stake a decade ago to block NTL from getting the network, and most of it was sold in 2006 prior to NTL becoming Virgin Media and then Liberty Media. The money will help enable BSkyB to buy Murdoch out of Fox TV in Italy and Germany. BskyB is owned 39% by Murdoch's 21stCentury Fox. The full price would be about 10 bn euros, however.

Murdoch may sell if he needs the cash to buy TimeWarner.

*Bombardier is in the news on the rail side. The KPMG audit of the deal now blames Transport for London (the Tube) for excessive optimism in accepting the BDRAF low bid for upgrading track signaling systems on 4 London lines. TfL failed to look into how badly the Canadians had fared in earlier mega-contrcts in Spain and jumbed at the GBP354 mn bid. In fact the oversight was also lacking. BDRAF was not blamed for the collapse of the deal which cost London Underground a further GBP100 mn to complete the work on the Hammersmith & City, Metropolitan, Circle, and District lines, which will be done by Thales and completed only in 2018.

Separately The Economist noted that supercapacitors on the track enable BDRAF trains to store braking energy for use by other trains, an energy-saver developed by Bombardier.

*Lawyers for Dr Jeremy Levin are still trying to collect more from Teva over his dismissal last Oct. according to boardroom dissident Benny Landa who first revealed the sacking. They are negotiating so far, not suing. Landa now is opposing the naming of Amir Elstein as new chairman of the Teva board to replace Dr. Philip Frost, an American of mixed reputation. Elstein is a member of the founding Teva family.

Landa has been yakking to Reuters about the arbitrariness of the ouster of Levin which already cost Teva $7.2 mn last year mainly because he is upset that another chairman is being designated without consultation with the rest of the board. Mr. Landa is an Israeli mogul who joined Teva shareholders and its board during the Levin 15 month CEO-ship and is now aiming to boost good corporate governance in Israel. While Teva denies that Elstein has been fingered for chairman. US ISS Proxy Services has been corralled in to back the designated new directors who will name Elstein.

Delek Group will finance the sale to TDR capital of its gas stations and convenience stores in France and the Benelux. It is lending euros 310 of the eros 655 mn to the buyer for 4 ½ years at 4.25% over euribor. It also is providing a 2nd lien for euros 100 mn at 750 bp over euribor or1%, whichever is higher.

*Today in Dublin trading, Paddy Power plc rose 2.6% to 52.57 euros. PDYPF is trading at $70.15 bid, $71.9 ask. I am checking on these numbers because a reader has problems with getting Paddy stock.

*The Economist this week wrote about the Suzhou mechanized warehouse owned by Global Logistics Properties of Singapore which employs only 6 people because of its high mechanization. GBTZF.

*Meanwhile China Chaintek has named Daniel Stewart, the brokerage here, as its nominated adviser and house broker. We learned about CTEK from Daniel Stewart's enthusiastic coverage of the consumer goods logistics venture in China.

*Having succeeded Peter Munk to the chairmanship of Barrick Gold, John Thornton stepped down as CEO. His expected successor exited because he pushed for a merger with Newmont Mining, which was vetoed by Munk. So ABX is now headed by two co-presidents, neither of whom is CEO. We own the US$ 4.4% bonds issued by Barrick North America.

*Cameco reported on its Cigar Lake uranium mine commissioning. Jet-boring and freezing the water on site will be delayed into early 2015 rather than completing this year and CCJ will therefore not meet its 2014 production target. It also faces delays on the processing of any ore extracted at the McClean Lake mill. So the freezing will go on longer and perhaps succeed better in stopping mine flooding than the last effort. The long-term target production is 18 mn lbs/yr by 2018 and has not been changed.

Fund notes:

*Investor of Sweden produced a partial interim report today, It said net asset value closed June at SEK 232.501 mnor SEK 305 in NAV per share, up 5% in Q2, but half of that increase already given to shareholders via a dividend. The fund bought more ABB for SEK 833 mn, and its wheelchair investment, Permobile, bought another maker of wheelchairs to help Sweden cope with its elderly. The two funds IVSBF owns had differeing results. EQT distributed SEK 117 mn to Investor and its NAV rose 10%. However Investor Growth Capital, which distributed SEK 1o5 mn to Investor, saw its NAV decline 3%.

IVSBF consolidated net realized and unrealized profits nearly doubled in Q2 to SEK 23.715 bn or 31.15 per share, vs 12.715 bn or 16.71/sh in the prior Q2. In both periods Investor uses leverage of under 10% to boost its earning power.

*Fibra Uno, the Mexican “fibra” or REIT completed for $287 mn acquisition of two shopping malls in Guadajara and Puerta Vallarta, which were notpart of the R15 portfolio acquired earlier this year by FBASF. The venerable Gallerias Guadalajara commercial center with operating revenues of 284.3 mn pesos, was bought for 3.459 bn, only 739 mn of it in cash, and the rest in shares. It is over 90% occupied. However, the Peninsula Vallarta site is only 75% leased and FBASF will pay 260 mn for it, only 57.2 mn in cash, and the rest in shares. Its success depends on tourism.

Fibra Uno expects to generate over 306 mn pesos in operating profits from the two sites in the next 12 months. It acquired from R15 a portfolio of mostly Mexico City offices and industrial sites for 23.5 billion peso in May plus other premium ones in Quintana Roo, Jalisco, Veracruz, Sonora and Mexico state.


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