After 117 years, the silver price fix will come to an end on Aug. 14.
Last month, Deutsche Bank resigned its seat from the silver fix, leaving only HSBC and the Bank of Nova Scotia. This may have been precipitated by the increased scrutiny of metal price setting that followed the Libor scandal and a probe into potential forex market abuse. The two remaining firms were no longer capable of carrying out the mission of this price-fixing consortium.
The demise of the silver fix does not bode well for the future of other precious-metal-fixing benchmarks, such as platinum, palladium and gold in particular.
Unlike other commodities, such as copper and coffee, gold does not trade on an exchange in London. Instead, it is a 24-hour over-the-counter market overseen by fixing members and market-making banks.
At 10:30 a.m. and 3:00 p.m. London time, five banks conduct a secure conference call lasting roughly 15 minutes to determine the price of gold. The London gold fix is used by central banks, financial institutions, miners and jewelers to value bullion, and the prices for numerous derivative products are based on this benchmark price fixing. The five fixing banks are: Barclays, Deutsche Bank, Bank of Nova Scotia, HSBC and Societe Generale.
Deutsche Bank also resigned its seat on the gold fix last month, leaving four fixing banks going forward. This group will be able to continue in the near term.
The conference call is also made available to an 11-member market-making body, which includes Goldman Sachs, JPMorgan Chase and UBS, that is part of the London Bullion Market Association. However, transcripts of this call are not available to the public — neither are the prices and volumes discussed.
During the first four minutes following the beginning of the London afternoon fix, the volume of gold futures and exchange-traded fund contacts rose more than 50 percent and volatility increased 40 percent between 2007 and 2012, according to a study by Andrew Caminschi and Richard Heaney from the University of Western Australia published last year in The Journal of Futures Markets.
These data suggest action was taken in response to information transmitted during the call prior to public notification. The direction of the trades had a very strong correlation with the ultimate price of the fix, sometimes exceeding 90 percent. The return on investment was far greater than the trading expense, deeming it economic or materially significant, according to Caminschi and Heaney.
This scenario implies proprietary trading by the fixing banks and market-maker members may have occurred, along with possible price collusion. These institutions have not commented on this allegation. At least 20 class action lawsuits have been filed for manipulation by banks responsible for the gold fix.
Natalie Dempster, managing director of central banks and public policy at the World Gold Council, told the Financial Times that electronic capturing of the auction process with real-time dissemination and external oversight is recommended.
The metal fixing does not promote healthy competition in determining its price. These metals should be traded on a publicly regulated exchange that promotes liquidity, capitalization and low transaction costs in a competitive public forum.
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