THE BLOG

Gold Price Scandal Further Exposes London's Bankers

24/01/2014 12:19 GMT | Updated 26/03/2014 09:59 GMT

We've become accustomed to financial scandals these last few years. Never before have we had so little trust in finance.

You'll remember the PPI, LIBOR, toxic mortgage-backed securities scandals and much more.

Another scandal is now brewing around how the gold price is set. An old, opaque process called the London Gold Fix occurs twice daily in London to set a benchmark price for gold bullion investors.

Attention on the London Gold Fix is now growing amidst arguments that it is not fit-for-purpose and provides an unfair information advantage for the banks that manage the Fix.

As a result the three most powerful regulators in the Western world have stepped in to investigate this.

Explaining the London Gold Fix

The fixing - which dates back to 1919 - involves a twice daily teleconference between five banks - Bank of Nova ScotiaMocatta, Barclays, Deutsche Bank, HSBC Bank USA and Societe Generale.

The fixings are significant in determining global gold prices, whilst Chairmanship of the Fix rotates annually between the member banks.

At the start of the fixing, the chairman announces an opening gold price to the other four members, who relay this back to their traders and customer and then present themselves as buyers or sellers at that price. The price is then adjusted up or down until the fixing members can match supply and demand between them. At this point the gold price is 'Fixed'.

The London Gold Fix determines the price at which billions of dollars of gold is traded each day and affects buyers and sellers all round the world.

Problems with the Fix

The fact that a few large banks 'manage' so much of this price setting process is under scrutiny.

Many argue that the opacity of this market process is not acceptable and in stark contrast to the transparency of major financial exchanges. The large member banks have their own books and trades to manage after all.

Others have also pointed to suspicious activity at other gold exchanges during the London Fix, which suggests the Fix might not be quite as private and sealed as it should be. These trading spikes have been questioned as insiders trading off privileged information before it is available to the wider market. (There's a more detailed look at this here).

It seems like an outdated and unusual way to set a market price, and one that creates positions of real privilege in the market and potential cartels. This scandal also risks bringing London into disrepute, which is a problem given the constant competition we face from New York, Hong Kong and Singapore.

Why should I care?

The gold market and how the price of gold is set might seem a tad distant to you. But, it affects the price you buy jewelry at and over two billion Asians (many who enjoy a far lower standard of life than we do) who invest in gold as part of their culture and habitual saving.

Covering these issues of rigged markets, here's what Matt Taibbi had to say in Rolling Stone magazine:

"After scandals involving libor and, perhaps, ISDAfix, the question that should have everyone freaked out is this: What other markets out there carry the same potential for manipulation? The answer to that question is far from reassuring, because the potential is almost everywhere. From gold to gas to swaps to interest rates."

Is it any wonder we don't trust the finance and bankers?

There must be a better way.

Sunlight is the best disinfectant

As in most areas, sunlight brings amazing disinfectant qualities.

All this hoo hah about setting gold prices in London could be put to bed if traders bought and sold on an open, audited exchange in the City. Exchanges offer incredible levels of transparency and provide market users with amazing amounts of data, all on a level playing field.

It's amazing how many areas of finance operate without the healthy transparency of exchanges and open platforms. The London Gold Fix might not be something you were previously familiar with, but there's no reason why this financial market process should not be brought up to date.

Hopefully how gold prices are set in London evolves to serve people and markets better... and quickly.

Yet again the financial sector has shown that it needs to work far harder to regain our trust.