Imagine you were tasked with designing a process to calculate the price of gold. Imagine, too, that the year is 1919; you are attempting to re-establish London’s reputation as an international financial centre after the First World War. Given the situation, the following solution may have seemed reasonable: first, request that the cigar-smoking, bowler-hatted representatives of five bullion dealers and banks congregate in the wood-panelled boardroom of N M Rothschild & Sons on St Swithin’s Lane. Second, leave them alone to discuss whether they have more net interest in buying gold, in which case the previous day’s price increased, or in selling the 400-ounce bars, a signal to reduce the value. Third, request that the final price be made known to the public.
The “London gold fixing”, which ended last month after nearly 96 years, placed an extraordinary amount of trust in the bankers who ran it. The system was opaque and unregulated but it was also simple and efficient. The mining companies, banks and jewellers that used the twice-daily benchmark to trade and value their gold stocks were happy, so there was little pressure for reform. In 2004, when the five fixing banks agreed to confer in a private teleconference rather than in person, the tradition of raising a small Union Jack to pause proceedings – “Flag up!” – became obsolete. But the mechanics and opacity of the fix remained intact.
Then came the 2008 financial crisis and evidence that traders had manipulated foreign-exchange and interest-rate benchmarks for their own gain. Suddenly the idea that a handful of investment banks – Barclays, Deutsche Bank, HSBC, Société Générale and Bank of Nova Scotia – should be allowed to set the benchmark for gold, an important part of the $18trn-a-year bullion trade, seemed old-fashioned at best. You did not need to be a conspiracy theorist – and the gold investor community includes many – to see how the fix might have been open to abuse.
Financial regulators in the US and Europe started to look closely at precious metals benchmarks. American class-action lawyers launched suits alleging rigging. Last year, Deutsche Bank put its once valuable fixing seat up for sale and then resigned it when it found no takers. A month later, in May, the Financial Conduct Authority (FCA) fined Barclays £26m after one of its traders manipulated the benchmark. It was clear that the fix was dying.
“This was an archaic mechanism dating back nearly a century,” says Brian Lucey, a professor of finance at Trinity College Dublin. “It was not something you would have devised if you were starting today.” And so, at 3pm on Thursday 19 March, the remaining four banks dialled in to their conference call for the last time, setting the price at $1,166 an ounce. The London gold fixing was officially dead.
The new benchmark, the London Bullion Market Association Gold Price, is electronic. It is administered by the Intercontinental Exchange, owner of the New York Stock Exchange, and is regulated by the FCA. The fixing banks will still do the trading, along with UBS, JPMorgan and Goldman Sachs. Banks from China, a big gold market, may soon join. Transparency and oversight will be improved, with a full audit history available for the first time.
“This should give people more comfort that it’s a true benchmark price for gold,” says Lucey. “But unmanipulable? If human ingenuity wants to find a way, it will.”