news.goldseek.com / Julian D. W. Phillips / 27 June 2014
Since the Barclays trader was found guilty of manipulating gold prices and Barclays fined $44 million, the entire “Fixing” process has come under the spotlight. The bankster involved is thought to reflect one or maybe other ‘rogue’ traders, not a condemnation of the whole process of the “Gold Fix” by the banking fraternity.
Nevertheless, many are saying it is archaic and should be done away with. The danger with this attitude is that the need for the “Fixing” is critical to the bulk of gold that it traded globally. Accordingly there are three proposals, at the moment, to be discussed in a Forum arranged by the World Gold Council. It is appropriate that the WGC hosts such an event as they are funded by gold producers across the world and will favour not just a buyer’s position but the seller’s.
The need for a “Fix”
What do we mean by this? By now you are all aware that twice a day the five London Bullion Banks link up by phone and bring all their clients together to weigh up a price that reflects demand and supply within 50 bars of gold. Then the price of gold is “Fixed” at that price and all deals discussed at the session are done at that price. Please note that when we say the bank’s clients, we are talking of clients who cover the range of participants
Let’s be clear on what this process really is. It is not an average price during a day, it is not a random price set at certain times, it is a price where the greatest volume of gold is traded in one ‘place’ at one time, twice a day. It is favoured because it is the most representative price of gold’s demand and supply at two points in the day. It is where the greatest volume of gold is traded on that day. And that is the point that must be emphasized. It is most representative of the bulk of gold traded twice a day.
After the Fix, the gold price may move strongly in another direction, but this will be on smaller volumes or involve far fewer players, not representative of the total market. If gold trading were restricted to just these two processes in London, then it would be a true reflection of demand and supply. But this could never happen in view of the diverse nature of the gold market. But because it is the closest price to a balance of demand and supply traded on a daily basis, it is taken as such and therefore pertinent to setting contracts outside of the market. Any other mechanism that does not reflect, at least in main part, demand and supply on a daily basis would fall short of the market requirements for price setting. As we have seen it may occasionally be manipulated by a bankster or two, but it remains the closest to a true reflection of demand and supply. Any alternative system must bring the same elements to a replacement price setting process.