London Gold Fix Rigging – Fact or Myth?

The London Gold Market is a part of the London Bullion Market, which is a wholesale overthecounter market for the trading gold and silver, coordinated by the London Bullion Market Association. It is the wholesale market – the usual minimum size of transaction is 2,000 ounces of gold (while the standard size is 5,000 ounces) – individual investors are practically excluded from the market. The London Gold Market was the most important gold market until the 1970s, when the American Commodity Exchange Inc. (Comex) started to trade gold futures and soon gained prominence. Currently, the gold market is dominated by these two centers of gold trading. The Comex dominates the market in gold futures, while the London Gold Market is by far the largest global center for overthecounter (OTC) transactions. It is also the biggest marketplace for gold in the world by the volume of trade (the London OTC spot market is about ten times higher that of the U.S. futures market), which clears the annual mining production of gold every few days.

How does the London Gold Market really operate and how does it influence the price of gold? London has always been an important center for precious metals. The first records of bullion transactions date back to the 17th century, when the firm of Mocatta and Goldsmid (now ScotiaMocatta), the oldest member of the London Gold Market, was established. However, it truly originated in the 19th century, when London became the global financial center. London dominated global commerce and finance and the British pound was under the gold standard. Soon the large gold reserves of Australia and South Africa were discovered (they were British colonies at the time), hence London quickly became the hub of bullion trading. The gold confiscation implemented by Roosevelt in 1933helped London to keep its position. Nowadays, London is still considered as one of the most important markets, offering many useful services for gold investors.

First, most transactions are cleared through London, even though the physical market for gold is global. Due to the strong position of the London gold market, clients from all over the world have open bullion accounts, called Loco London accounts, with London bullion dealing houses. This is why most transactions are settled by transfers of bullion in London through its clearing system.

Second, the London market maintains the global standard for the quality of gold bars. Only bars produced by refiners meeting the required conditions specified in the Good Delivery Lists can be traded in the London market. The Lists assure the common standard in the market, improving the quality and increasing the confidence among its participants.

Third, the London market offers vaulting services. Seven commercial custodians and the Bank of England provide secure locations for bullion traded on the market. These custodians act also as gatekeepers, checking the weight and quality of the gold bars.

Finally, the London market sets the gold fix – the socalled LBMA Gold Price – twice a day: at 10:30 GMT, and 15:00 GMT in the U.S. dollar, serving as a benchmark for pricing the gold widely used by producers, consumers, investors and central banks. Gold fixing was introduced in 1919 with the London Gold Fixing system. Initially, the fix was established by five banks in an elegant private auction at the London offices of Nathan Mayer Rothschild & Sons. Until 1968 there was only one fixing in the morning and the price was set in British pounds. In that year, the second fixing at 3 P.M. was added to cover the opening of the American market, while the price of gold started to be fixed in the U.S. dollar. Some analysts claim that the price of gold is manipulated during London hours, or that the London P.M. fixing is rigged. However, the chart below does not show any systemic deviations between those two prices.

From May 5, 2004 to March 19, 2015 the fixing has was conducted via a dedicated conference line. On March 20, 2015 the LBMA Gold Price replaced the London Gold Fixing price. The fix is now conducted via an electronic platform managed by the ICE Benchmark Administration, not through a private arrangement, with conference calls twice a day. The aim of that change was to bring more transparency to the price discovery process and to increase the number of participants involved in setting the benchmark price of gold (now, there are twelve price participants instead of five or even four as it used to be.)

How is the LBMA Gold Price set? At the start of each fixing, the chairperson sets the starting price at the level thought to best match the demand with the supply. Then, participants enter their buy and sell orders by volume. If the market is out of balance, business cannot be done and the new round of entering volumes is required. For example, if more gold is offered than demanded, then the price will be adjusted downwards (and vice versa), until equilibrium is reached. The process iterates until the net volume of all participants fall within the predetermined tolerance at the end of a round (i.e. the imbalance is set at 10,000 oz.). The auction is complete when all volume is traded at that fix price. What is important is that the participants buy/sell gold not only on their own behalf, but also on that of their clients.

Summing up, the London Gold Market is the crucial market for gold. It is the biggest marketplace for gold in the world by the volume of trade. However the U.S. futures markets may play a slightly more important role in the price discovery. As an overthecounter market, the London market is less transparent. However, this does not mean that London gold prices are manipulated. The London market is simply structurally different from centralized exchanges. Still, it provides many useful services for the gold investing community.

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