In a conference call twice each day, representatives of five large banks convene to determine what the price of gold should be for central banks, mining companies, and other parties that move large amounts of the precious metal on the global market.
The process, known as the “London Fix,” dates back to 1919, and currently involves bankers from Bank of Nova Scotia, Barclays, Deutsche Bank, HSBC, and Societe Generale. The bankers simulate the trade of gold among themselves based on the orders currently on their books. Eventually they reach a consensus price, which is then announced to the markets.
Now, however, research published in the Journal of Futures Markets indicates that, in the time between the start of the fixing and the announcement of the result, trading spikes in gold futures contracts and a major gold-based exchange traded fund.
Summarizing their findings, Andrew Caminschi and Richard Heaney, of the University of Western Australia, wrote, “We find significantly elevated levels of trade volume and price volatility immediately following the fixing’s start, well before the conclusion of the fixing and the publication of its results. Similarly, we find statistically significant return advantages in the 4 minutes following the start of the fixing for informed traders.”
Those trading spikes appear to suggest inside knowledge of the result of the fix, they found.
“Trades in the opening minutes of the fixing are significantly predictive of the price direction of the fixings, in some cases exceeding 90 percent,” they write. “Combined, these findings support the following conclusions:”
- The London PM gold price fixing does have material impact on the exchange traded gold instruments.
- Information from the fixing is leaking into markets prior to the fixing results being published.
- There exist economic returns for trading on these information leaks.
Media reports out of London have indicated that the U.K.’s Financial Conduct Authority is in the early stages of an investigation into the fixing process – but no banks or individuals have been accused of wrongdoing.
While inside knowledge of price movements can allow traders to capitalize on even small changes, some experts in gold trading said they doubt that the London fix results in mispricing on the global market.
George Gero, a senior vice president with RBC Wealth Management in New York, said that the ability of even the banks involved in the London Fix to manipulate the price of gold is almost non-existent.
“The market is too liquid, too big and too international,” Gero said.
Gold is traded globally, 24 hours a day, he said, and the Commodity Exchange in New York “is much more influential in the daily markets” in terms of pricing. - Follow Rob Garver on Twitter @rrgarver
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