London's scandal-hit gold price fixing under spotlight
By Jessica Berthereau, AFP
July 7, 2014, 12:05 am TWN
LONDON--London's century-old gold price fixing, tainted by a rigging scandal and attacked by critics as old-fashioned, goes under the spotlight this week in key talks aimed at modernizing the process.
Analysts said that the market price of gold, which is driven by investment and jeweler demand, could climb as a result of an overhaul.
Buyers and sellers of the precious metal will meet in London on Monday to discuss the setting of the global benchmark, which affects the flow of billions of dollars worldwide every day.
The World Gold Council (WGC) will host an eagerly awaited forum with retail and central banks, exchanges, mining firms, refiners, traders and other industry groups, while Britain's Financial Conduct Authority (FCA) watchdog will attend as an observer.
The benchmark gold price is set by four banks at 10:30 a.m. London time (0930 GMT) and 3:00 p.m., via teleconference.
The banks — Britain's Barclays and HSBC, Canada's Scotiabank and Societe Generale of France — are all members of the Gold Fixing Company and agree the price twice daily. Germany's Deutsche Bank pulled out of the panel earlier this year.
The process begins with the so-called spot price of gold, which is based on the current market rate of contracts for physical delivery of the metal.
The four banks must then declare whether they are interested in buying or selling at this level. The price can fluctuate depending on the balance of supply and demand and settles on a so-called “fixing.”
The system lurched into crisis this year when Barclays was fined more than 26 million pounds (US$45 million, 33 million euros) by the FCA after a ex-trader at the troubled bank admitted attempting to manipulate the gold price.
Barclays is among several banks that were fined billions of dollars by regulators foreign exchange rigging, prompting a broad review of how global financial benchmarks are set.
Critics argue the gold-price fixing process is also open to abuse.
“It lacks transparency, which means prices can be rigged to benefit banks, at the expense of producers, traders, investors, jewelers and other market participants,” said Mark O'Byrne, research director at broker GoldCore.
“Prices should be determined by market forces of supply and demand and not due to a bank's determination.”
The process is little changed since its creation on Sept. 12, 1919, when the Gold Fixing Company's five founders — including NM Rothschild & Sons — agreed one single daily price fix in British pounds.
O'Byrne added: “The gold fix is anachronistic in the modern technological age of electronic trading and a move to electronic trading seems inevitable. At the same time, this will not be a panacea as oversight and transparency remains important.”
Call for Transparency