HISTORIC GOLD FIX PRICING SYSTEM CRITICISED AS VULNERABLE / THE FINANCIAL TIMES

May 23, 2014 10:51 am

Historic gold fix pricing system criticised as vulnerable

By Neil Hume and Xan Rice

Get Alerts

Start alertsGet an email alert for Neil Hume
Start alertsGet an email alert for Xan Rice

©Bloomberg

Unlike other commodities, such as copper or coffee, gold does not trade on an exchange in London. Investors wishing to buy and sell gold wholesale rely on a 24-hour over-the-counter market serviced by a number of investment banks such as Goldman Sachs, JPMorgan and UBS.

The main futures contracts are traded in New York and Shanghai. The gold fix, which has existed since 1919, takes it cue from and influences these markets.

The fine handed out to Barclays on Friday for manipulating the price of gold will renew calls for the gold fix to be abolished in favour of a more transparent benchmark. 

In recent years, numerous critics, including two academics, have claimed that the fix was open to manipulation, despite strong denials by the member banks. At least 20 class action lawsuits have been filed in the US since March alleging that the benchmark was rigged.

The silver fix, which was established in 1897, is already on its way out, following the withdrawal of Deutsche Bank, which left only two other banks in the auction process.

The fix is an auction-style process, which occurs at 10.30am and 3pm every weekday via a secure conference call in London. It is used by miners, jewellers, central banks and the financial services industry to trade gold and value inventories.

Four banks – HSBC, Scotiabank, Barclays and Société Générale – join the call. The chairman – the job rotates among the banks annually – suggests an initial price, close to the market price. Each bank confers by telephone with its clients – other financial institutions and gold producers and consumers – and then declares if it is a buyer, seller or has no interest. If there are only sellers, the price is lowered, and vice versa.

When there is two-way interest, members say how many 400-ounce (12.4kg) gold bars – each worth about $571,200 at current prices of $1,293 a troy ounce – they wish to trade. The chairman moves the price, and the banks adjust their orders, until the difference between buying and selling requests is less than 50 bars, at which point the price is fixed. The call usually takes less than 15 minutes.

In fining Barclays £26m on Friday, the Financial Conduct Authority said the bank placed orders during the fixing period on June 28, 2012 to make sure the benchmark did not settle above a certain level.

This was because one of its traders, Daniel Plunkett, had an outstanding derivatives contract. If the benchmark fixed above $1,558.96, Barclays had to make a payment of $3.9m to a customer holding the ‘digital exotic options contract’. If it closed below, Barclays would not have to make that payment.

“Plunkett placed certain orders with the intent of increasing the likelihood that the price of gold would fix below the barrier, which it eventually did,” the FCA said in its statement.

Sensing what had occurred, the unnamed customer sought an explanation from Barclays as to what had gone on. The response was less than satisfactory and led to Friday’s fine and decision to ban Mr Plunkett from performing any regulated activity in the UK.

“When Barclays relayed the customer’s concerns to Plunkett on 28 and 29 June 2012, he failed to disclose that he had placed orders and traded during the gold fixing. Further, Plunkett misled both Barclays and the FCA by providing an account of the events that was untrue,” the FCA said in a statement.

Copyright The Financial Times Limited 2014.