BullionVault’s Adrian Ash considers the gold fix – what and why it is

Adrian Ash, head of Research at BullionVault, has considered the particulars of the London Gold Fix, in light of the latest concerns of regulators that it may be what it says it is – a fix.

So is the London Gold Fix a fix? Anyone paying attention knows it’s the wrong question. But derivatives-market regulators in Washington think it might be. Quite what they’ve got to do with it, we can’t imagine.

The fixing exists because, in the physical bullion market, there isn’t any single price at any one time. Instead, all the different bullion banks and dealers quote their own prices direct to their clients. So the deals they strike are unique, with no centralized “clearing house” or “recognized exchange” reporting those deals as some kind of official price.

Freely agreed between two consenting parties who need to judge each other’s credit and other risks directly, this kind of deal is very different to a formal stock market or derivatives exchange. It also makes valuing gold (in central bank vaults, say, or jewellery stockpiles) difficult. And it also means that large but less active traders – such as gold miners, or industrial users – can’t be confident they got “true” market price.

Hence the fix, and hence its name. The fixing is essentially a snapshot of where the market stands for gold at 10:30am and 3pm (and for silver at midday) in London, heart of the world’s physical bullion trade.

To take that snapshot, the biggest bullion banks look at their outstanding client orders, net off the buyers and sellers, and then get together to agree a price which clears what remains. So make no mistake – the fix is NOT a notional price.

Real supply and demand from real sellers and buyers creates the fix, and real business is done at that price (lots of it, too). That makes the fixing very different from the interbank Libor lending rate.

Libor is merely reported by the big investment banks. It doesn’t necessarily match interest rates as they stand. Which opens the door to fraud, manipulation and – four or five years after regulators catch onto the scandal – big fines for offenders. The London bullion fix, in contrast, offers genuine price discovery.

Yes, the fix is done behind closed doors (gasp!). No, it isn’t formally regulated by government (oh horror!). And yes, it both follows and then leads the “spot price” quoted in live wholesale trading. But that single “spot price” doesn’t exist, remember. The fix exists to fill that gap. And it has been running since at least 1919 (and probably before, history fans).

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