Is the London Fix fixed?

It is with a growing sense of disbelief that one reads ongoing stories about the supposed rigging of the London gold fix. The questions center on the following:

 

Why are there price spikes during the afternoon fix and not the morning fix?

The answer is because the p.m. fix is when both London and New York are both open and as a buyer or seller you have a greater chance of getting a better price when liquidity is optimal. You would not for example get a good price when market participants are absent. If you have a big position to put on (or take off), you trade when most others are available to take the other side of your trade.

Why are there large price moves during the time of the fixing? 

The answer is the fix is a price discovery process and as such large buying and selling orders collide here - large moves are therefore to be expected. In fact, the mere fact that it does move confirms some differences in opinion over fair value between the clients dealing in the fix - actually it supports the notion of the integrity of the process.

Why is the move often down and not up? 

The answer is that the fix is used by official institutions (like central banks) and many major miners who all require an "objective" and published price because they need to more accountable than say a proprietary trader. The spot price for example is neither objective nor published. Selling by miners in size every day and invariably outweighs any official buying which is typically large but infrequent. Hedging or financing for the miners have will often link their financial arrangements to the gold fix. 

Why is the fix done on a private call amongst members? 

The answer is that it's not private, it is an open call. Clients dealing on the fix can and do change their orders - or indeed cancel them during the process. This is fundamental and fixing members will not know their own client orders in advance of the fixing process - let alone client’s orders done through other fixing members.

If the London gold dealers had consistently shorted gold as maintained then they would have incurred losses of such a colossal scale to render the economic crisis a sideshow in comparison (gold has rallied six-fold over the last decade). In short, the desks would have been closed down 10 years ago.  

The reports conclude that the process is "open to manipulation", which has been taken up by the wider media to presume with certainty that it has. You could add that any deal on the floor of any exchange or where there is a human element has precisely the same weakness. To presume guilt is something altogether different. We do seem to live in a world where rumor carries more weight than fact or any real endeavor to understand how things operate.       

If vested interest is the key issue here then one wonders about the motivation of the report author who stands to benefit directly and personally from these allegations. Bloomberg - shame on you also for a lack of journalistic discretion and judgment ... and a failure to ask the right questions.

About the Author
Ross Norman

Ross Norman is owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.

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