London’s century-old process for fixing gold prices, tainted by a rigging scandal and attacked by critics as old-fashioned, goes under the spotlight this week in key talks aimed at modernising the process.
Analysts said that the market price of gold, which is driven by investment and jewellery 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 am London time (0930 GMT) and 3:00 pm, 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 ($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, jewellers 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 September 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.”
Caroline Bain, senior commodities economist at research consultancy Capital Economics, said transparency was needed to prevent price rigging.
“It can be manipulated even though it is based on real deals,” Bain told AFP.
“Traders working for institutions involved in the ‘fix’ can make deals that would influence the price in a way that suits their portfolio.
“There is a lack of transparency about how the price is derived. It also contributes to a much wider lack of information on the size of the gold market.”
For its part, the WGC has already stated that the gold market needs greater transparency and auditing of the data used to determine the London price fixings.
Between two and four million ounces of physical gold transactions are based on any given day’s fix price, according to estimates from commodities research specialist CPM Group.
Back in May, Barclays was fined by the FCA for failing to adequately manage conflicts of interest between the bank and its customers.
The watchdog uncovered systems and controls failings in relation to a fixed London pricing of gold over a nine-year period to 2013.
Bain added: “The case was more about internal problems at Barclays as they were not monitoring the trader’s activity, but it did highlight the fact that the gold fix can be manipulated.”
The gold market remains subject to volatility as the metal is often seen as a haven investment in times of geopolitical uncertainty.
In recent weeks, mounting violence in Iraq has sent traders fleeing to gold.
Gold jumped last Tuesday to a 3.5-month spot price high of $1,334.06 per ounce on the London Bullion Market.
Prices had rocketed to an all-time peak of $1,921.15 per ounce in September 2011 on fears of a fresh global recession amid the raging eurozone debt crisis.
The market could return once more to such levels if the fixing system is overhauled, according to O’Byrne.
“We believe that a more transparent and reliable fixing could lead to higher gold prices as we suspect that prices are artificially low at this time and do not reflect the delicate supply demand balance in the physical gold market,” he told AFP.
“Nor do they capture the degree of systemic and geopolitical risk in the world today.”