London gold fix to face overhaul amid scrutiny
London (Jan 22) Banks are considering an overhaul of London’s century-old gold benchmark used by miners, jewellers and central banks to buy, sell and value the precious metal, according to a person with knowledge of the process.
The five banks who oversee the so-called London gold fixing — Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA — have formed a steering committee that’s seeking external firms to advise how the process could be improved, according to the person, who asked not to be identified because the review isn’t public.
The fixing refers to a rate-setting ritual dating back to 1919 in which representatives of the five member banks speak by telephone from a couple of minutes to more than an hour about buying and selling gold. The method has faced scrutiny in recent months, with regulators in London, Bonn and Washington — who are already looking into manipulation of interest rates and currencies — investigating how prices are set in the market.
While there’s no evidence the gold fix is being manipulated, economists and academics have said the way the benchmark is set is outdated, vulnerable to abuse, and lacking in any direct regulatory oversight. Deutsche Bank, Germany’s largest lender, said in a statement last week it plans to withdraw from the panels for setting gold and silver fixings. On conference calls at 10:30am and 3pm London time, firms declare how many bars of gold they want to buy or sell at the current spot price, based on orders from clients as well as their own account. The price is increased or reduced until the buy and sell amounts are within 50 bars, or about 620 kilogrammes, of each other, at which point the fixing is agreed on.
Traders relay shifts in supply and demand to clients during the calls and take fresh orders to buy or sell as the price changes, according to the website of London Gold Market Fixing Ltd, where results are published.
Bloomberg News reported in November concerns among traders and economists that the fixing banks and their clients had an unfair advantage because information gleaned from the calls provided an insight into the future direction of gold prices. Banks can bet on spot and derivatives markets for the metal throughout the call.
The five banks that co-own London Gold Market Fixing, which administers and sets the rate, are considering how to improve the process before European Union legislation on financial benchmarks’ regulation and oversight expected to come into force in 2015, according to an adviser to the commission who asked not to be named.
One option for the European Commission, the EU’s executive arm, would be to scrap the conference call and base the benchmark on an average of trades in the spot market over a short period, the person said. The legislation is currently before the European Parliament.
