London Gold Fix May Have Been Manipulated for a Decade

News surfaced earlier today that February saw gold achieve its biggest month-on-month increase since July 2013.

However, that positive news is now being eclipsed by a dire piece of information provided by Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, and Albert Metz, a managing director at Moody’s Investors Service.

They state in a draft research paper that unusual trading patterns recorded over the past decade at around 3:00 p.m. in London indicate that the London gold fix may have been manipulated over those years by the banks that set it.

The structure of the benchmark, which miners, jewelers and central banks use to value gold, “is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” Bloomberg quotes their report as saying. “It is likely that co-operation between participants may be occurring.”

That’s big news, The Motley Fool’s Dan Caplinger explains, not only because major gold market players rely on the London fix, but also because they have done so for so long — it “has been a key driver of prices for almost a century,” he states.

Evidence

Abrantes-Metz and Metz are basing their claim on data they gleaned from ”screen[ing] intraday trading in the spot gold market from 2001 to 2013.” They were searching for unexplained price movement that could point to illegal activity, according to Bloomberg, and beginning in 2004, they started finding exactly that.

Specifically, they noticed that spot gold prices frequently spiked at 3:00 p.m. London time, when the banks do their second daily fix calculation via conference call. That movement, which they describe as “overwhelmingly” downward, did not occur during the banks’ 10:30 a.m. call. While that in itself is not damning, Abrantes-Metz and Metz believe the fact that there is “no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards” is cause for suspicion.

Also adding clout to their assertion is the fact that Abrantes-Metz published a paper back in 2008 that contributed to the uncovering of the “rigging of the London interbank offered rate,” as per Bloomberg. That has led to Barclays (LSE:BARC), UBS (NYSE:UBS) and other firms being fined around $6 billion.

What now? 

As Caplinger points out, the gold price does not seem to have been affected by the report’s release. Traders, he said, “know well that prices can oscillate wildly in matters of minutes or hours, making a snapshot benchmark less relevant for their purposes.”

The real issue, he believes, is that this is not the first time price fixing has emerged as a concern. That’s a problem because over time, such allegations are likely to have “the more insidious effect of eroding confidence in the way markets work.” Ultimately, that could lead people to give up on the markets altogether.

For their part, Abrantes-Metz and Metz believe that it’s now ”down to the regulators to establish why there are such striking patterns.”

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

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