Survey: Does the London Gold Fix Need to Go?

When the London Silver Market Fixing announced in May that it will stop administering the London silver fix at the end of the day this August 14, the question for many market participants was: “is the gold fix next?” 

Two months later, that question still has not been answered. However, in that time, market watchers and participants have separated themselves into three camps: those who think the gold fix needs replacing, those who think it should be modernized and those who believe it’s fine as it is. Here, Gold Investing News breaks down the arguments of all the three sides.

Out with the old

The first two groups mentioned above have a similar concern about the London gold fix: transparency. Though the UK’s Financial Conduct Authority said last week that there is “no clear evidence” of collusion between the banks involved in the fix, the organization admitted that it’s possible manipulation has occurred.

Those gunning for replacement have proposed using alternatives such as US futures prices or increased reliance on the Shanghai Gold Exchange or Dubai Gold & Commodities Exchange, The Globe and Mail states.

However, a discussion hosted on Monday by the World Gold Council (WGC) indicates that for gold industry members, reform is more appealing. As Natalie Dempster, the organization’s managing director, central banks and public policy, explained to Reuters, “[t]here was no real view from anyone in the room that the gold fix should be abandoned and we should start redesigning it from scratch. There was a very clear consensus that users want reform not replacement.”

No final decisions have been made about what reform might look like, but a WGC press release regarding Monday’s meeting reveals that attendees believe:

  • The process of fixing the gold price should be expanded “to reflect the full range of market participants.”
  • The fix should continue to be based in London to “reflect both the deep pool of liquidity available in London, as well as London’s historic and current position as the primary trading centre for gold.”
  • The benchmark should be transparent in order to mitigate “any potential reputational risk for those administering” it.

Fix just misunderstood?

That said, some are perfectly happy to leave the gold fix as it is.

One such person is Ross Norman, CEO of Sharps Pixley. In an article published today, he lambastes recent reporting on the gold fix, commenting that journalists have clearly made “little attempt” to understand how it works. As a result, many gold market participants have an incomplete understanding of what a world with no fix would look like.

For instance, he said, many writers have “recycle[d] hackneyed stereotypes about secretive banksters” meeting to decide “arbitrarily” what the gold price should be. ”More laughably,” he states, “some authors suggest the gold price might rise if we dispensed with the fix — presumably on the notion that the banks have been artificially holding the price down … well who do you suppose creates the spot price that is your alternative — the same banks that are in the fixing room.”

Norman goes on to explain that for him, the central question is whether the fix is “fit for purpose.” Unsurprisingly, he believes “the answer has to be an overwhelming ‘yes.’”

That said, he does admit that “the gold market does not stand above scrutiny” and that the current gold fix controversy is partially due to the fact that “the fixing community … has failed to provide a spokesman who can explain the mechanisms of the fix and … answer legitimate questions from the media.” It has also failed to separate “the administration of the process from participation.”

However, Norman concludes, “we remain satisfied that the process is fit for purpose and it is with some disappointment we see the dismantling of an institution not because it is outmoded or anachronistic, but because the right questions have not been asked.”

What do you think?

Whatever happens to the London gold fix, it will undoubtedly affect market participants everywhere. On that note, Gold Investing News wants to know what you think should happen to it. Take our survey below to let us know.

 

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

Related reading: 

The Silver Fix is Dead, Long Live — What Exactly?