ROSS NORMAN : GOLD FIX - Lazy Journalists Just Don't Get It
Surely never before have so many lines been written by journalists on a subject that they palpably know so little about and have made little attempt to understand... as the London gold fix.
Yesterday we were questioned by the BBC in a live TV interview which demonstrated the problem ; their belief was clearly that a group of bankers met in secret and arbitrarily decided what the price should be without reference to actual trades and that was the price for that day - they clearly were unaware that gold also has a spot price outside the fix and that almost all commodities have a benchmark or reference price. The lack of research ahead of the interview was shameful - but that did not prevent them for recycling hackneyed stereotypes about secretive banksters. They are not alone.
More laughably 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 ! In fact, you would be more likely see less participation in gold amongst institutional investors and possibly central banks if you removed those moments of deep liquidity that the fix provides. To boot, London will have lost one of its most prized institutions which is a massive contributor to the UK economy and the envy of centres such as Dubai, Shanghai, Mumbai and Singapore. British experts in the sector are global leaders in many fields from trade finance, structured deals, vaulting, refining assaying and we stand to lose primacy in the global bullion market simply because a bunch of tired and rather lazy hacks cannot be bothered to work it out.
The central question is we see it is how can a fixing member usefully use the information of a possible trade in the fix to their advantage given that it can be changed right up until the precise moment the fix is settled - rather like a hammer coming down at an auction - the simple answer is he cannot. Go say to a traditional art auction or even bid on ebay and you will not have the right to revoke your trade. You do however get that flexibility with the gold fix. A fixing participant - or indeed someone getting a live commentary might be tempted to trade the gold futures markets in parallel during the p.m. fix but, given that the client fixing order bears no commitment to actually trade you would be crazy to do so.
Even the Treasury Select Committee into the gold fix missed the three key issues. Firstly client orders for the fixing are invariably given by clients to a fixing member during the process, secondly the client has the option of getting a fixing commentary so he has visibility on the likely fix price and thirdly he can change his order at any point during the process if he wants to change his mind - in short, the information to the fixing member is almost worthless if they have malice aforethought. As such it could be said to provide more transparency than most benchmarks and indeed in looking after the clients interests.
Frankly, if you wanted to stitch a client up there are many far, far easier ways. For example - reading him - if he is a gold producer you know with a high level of certainty which side of the spread he is likely to hit you on. Risks exist in all traded markets - voice or electronic and actually the London fix affords you more protection than most.
The question as we see it is the fix fit for purpose ? In the main the answer has to be an overwhelming "yes". This was seen earlier this week during the meeting held by the WGC at which a wide range of members from the bullion market (although not the LBMA and no fixing members were present - in fact only one bank). In the final session we were invited to offer creative ideas to improve the fixing mechanism... not a single person could reply and consequently the meeting was wrapped up half an hour early.
Now the gold market does not stand above scrutiny and to some extent blame for getting to this pretty place does also lie with the fixing community. Firstly it has failed to provide a spokesman who can explain the mechanisms of the fix and to answer legitimate questions from the media. And secondly it should have separated the administration of the process from participation - that would have ensured self-scrutiny would have been observed.
Speaking as a user of the fix (not a fixing member) 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.
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09 Jul 2014
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