10 November, 2009

Report: London Morning and Afternoon Gold Fixings

(The following article was originally written and published on Yahoo 360 in December 2006, when gold was trading around USD $630 per ounce. When this article was updated and re-published in August 2015, gold prices are trading at around USD $1,100 per ounce.)

Addendum: Following the global credit crisis that began in 2007, much more scrutiny has been placed on the trading of financial instruments and the lack of transparency in many cases.  Illegal insider trading, price manipulation and collusion between institutional traders have been uncovered in the forex (foreign currency) and the Libor (London Interbank Offered Rate) markets, amongst others.  The subsequent tighter regulation and capital requirement on trading of risky assets prompted several global investment banks to exit the commodities trading market.  In early 2014, Deutsche Bank announced that it was withdrawing from both the London gold fix and London silver fix processes.  The London Market Fixing Ltd. then announced that the daily silver fix process would end and the last silver fix would be published on 2014-08-14, ending a 117-year tradition.  The London gold fix process was also officially terminated in March 2015, but replaced by the London Bullion Market Association's (LBMA) price-discovery process as of Friday, 2015-03-20. The new pricing process has 10 accredited participants: Bank of China, Barclays, Goldman Sachs, HSBC, JPMorgan Chase & Co., Morgan Stanley, Société Générale, Standard Chartered, Bank of Nova Scotia - ScotiaMocatta and UBS. Two new participants joined the process later in 2015, namely China Construction Bank and Toronto-Dominion Bank.

Prices are still set twice daily at 10:30 and 15:00 in London, but the process is now administered and operated by an independent third-party provider: ICE Benchmark Administration (IBA).

Original Article on the former London Gold Fix

Keen watchers of the financial market doubtlessly have frequently heard the phrase "gold was fixed at so-and-so U.S. dollars per ounce in London this morning (or afternoon)." Precious metals have been traded around the world for centuries, but the official fixing of gold prices in London dates back only to Friday 12th September, 1919, inside the wood-panelled, sumptuous office of merchant banker N.M. Rothschild & Sons. At that very first fixing in 1919, an ounce of gold was quoted at £4 18s 9d (4 pounds, 18 shillings, 9 pence).* 

Between 1939 and 1954, the London Gold Fix was suspended first by World War II and the subsequent international economic difficulties.

With the decline of the British Pound as the world's reserve currency after the two World Wars, the trading and quoting of gold switched to the U.S. dollar in 1968.

From the very beginning to the present, five gold fixing members of the London Bullion Market Association have been responsible for the daily ritual that is much followed around the world. The original gold fixing members were N.M. Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. In recent years, the five gold fixing members have changed to Bank of Nova Scotia's ScotiaMocatta, Barclays Bank, Deutsche Bank, HSBC and Société Générale. The chairmanship of the gold fixing committee rotates annually amongst these five banks.

Two fixings are conducted every day for gold: the morning fixing happens at 10:30 A.M. and the afternoon fixing happens at 3:00 P.M. The process of the gold fixing, though rich in history and mystery, is simply the law of supply and demand. Institutional clients (suppliers and users of gold) place their buy or sell orders with the dealing rooms of the five fixing members. Each gold fixing member’s dealing room then nets out the orders to come up with a net buy or sell for the day, and communicates the net position to the gold fixing representative. At 10:30 am and 3:00 pm every business day, the five fixing representatives "meet" over a video conference call and the chairman announces over a speakerphone something like this: "gentlemen, we'll start the fix at 622 [U.S. dollars per ounce]... Barclays wants 60 [standard bars of 400 ounces], ScotiaMocatta wants 75, Deutsche offering 40, SocGen offering 20, HSBC offering 40."

"We've an imbalance [as demand totals 135 bars, with a supply of 100 bars], so we'll raise it to 628 and 10." As the price has now increased by USD $6.10 per ounce, the gold fixing representatives would need to contact their dealing rooms about the change in price to find out if the ultimate buyers or sellers are changing their orders. Until 2004 when the gold-fixing members still met face-to-face, they would raise a little Union Jack to signal that they are changing their orders while contacting their dealing rooms. These days, the representatives simply utter the word "flag" to signal that orders are being changed. Once a flag has been "raised" by any of the five fixing members, the chairman would announce "flag on" and wait until the changes are submitted. When eventually there is a balance from the buy side and the sell side, the gold fixing is completed and the chairman would say something like "we're in balance, 122 bars each side, there're no flags, fixed at 626 and 90 [USD $626.90 per ounce]. The raising of the little flag was perhaps the most intriguing part of the whole gold fixing process. The whole process may take only 10 minutes or so, longer if there is a significant imbalance between the buy orders and the sell orders.

The fixing for silver prices is similar, though there are only three fixing members (Bank of Nova Scotia’s ScotiaMocatta, Deutsche Bank and HSBC). Also, fixing occurs only once a day at 12:00 noon. The fixing for silver actually has a longer history, as the first fixing happened in 1897.

Once the fixing is announced, the price is relayed over the satellites, land and undersea cables and the Internet around the world and reported by the financial press. The London gold and silver fixings are still much followed by investors around the world because London is the most important market for precious metals. In addition, the fixings traditionally are used as the benchmarks for gold and silver, and billions of swaps, options and derivatives are priced, traded and settled using the London-fixed prices.

A common misconception about the fixings is that gold prices are “fixed” for the day based on the London fixings, which is not true. The London morning and afternoon fixings are just the settlement prices at those particular moments in time. Gold prices fluctuate constantly around the world, 24 hours a day.

Indeed, as gold serves as a hedge against inflation and political and economic uncertainties, it is the only true hard currency accepted around the world. Gold prices in Hong Kong, London, Zurich and New York are constantly quoted by the press.

* Before the U.K. moved its currency to the decimal basis in 1971, each pound (£) was divided into 20 shillings, and each shilling was equal to 12 pence, making a total of 240 pence to the pound. From 1971 onwards, each pound simply has 100 pence.

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