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ROSS NORMAN - Is the LONDON Fix Fixed ?

Feb
27

It is with a growing sense of disbelief that one reads ongoing stories about the supposed rigging of 
the London gold fix. The questions centre around the following :

- why are there price spikes during the afternoon fix and not the morning fix ? - answer ; because the
p.m. fix is when both London and New York are both open and as a buyer or seller you have a greater chance of getting a better price when liquidity is optimal - you would not for example get a good price when market participants are absent - makes sense. Got a big trade ? You trade when most others are available to take the other side of your trade. End of.

- why are there large price moves during the time of the fixing ? answer : the fix is a price discovery process and as such large buying and selling orders collide here - large moves are therefore to be expected. In fact, the mere fact that it does move confirms some differences in opinion over fair value between the clients dealing in the fix - actually it supports the notion of the integrity of the process.

- why is the move often down and not up ? answer : the fix is used by official institutions (like central banks) and many major miners who all require an "objective" and published price because they need to more accountable than say a proprietary trader. The spot price for example is neither of objective nor published. Selling by miners in size every day and invariably outweighs any official buying which is typically large but infrequent. Hedging or 
financing for the miners have will often link their financial arrangements to the gold fix. 

- why is the fix done on a private call amongst members ? - answer : it's not private, it is an open call. Clients dealing on the fix can and do change their orders - or indeed cancel them during the process. This is fundamental and fixing members will not know their own client orders in advance of the fixing process - let alone clients orders done through other fixing members. 

If the London gold dealers had consistently shorted gold as maintained then they would have incurred losses of such a colossal scale to render the economic crisis a sideshow in comparison (gold has rallied sixfold over the last decade). In short, the desks would have been closed down 10 years ago.  

The reports conclude that the process is "open to manipulation" - which has been taken up by the wider media to presume with certainty that it has. You could add that any deal on the floor of any exchange or where there is a human element has precisely the same weakness. To presume guilt is something altogether different. We do seem to live in a world where rumour carries more weight than fact or any real endeavor to understand how things operate.       

If vested interest is the key issue here then one wonders about the motivation of the report author who stands to benefit directly and personally from these allegations. Bloomberg - shame on you also for a lack of journalistic discretion and judgment ... and a failure to ask the right questions... 

 

About the author

Ross Norman

Ross started his business career with business guru Sir Clive Sinclair of Sinclair Research in Cambridge, before joining Johnson Matthey as Gold Refining Manager (then the worlds largest gold refiners), then as a gold trader at NM Rothschild & Sons (the Chairman of the London Gold Fixing) and later Credit Suisse, where he was a Senior Dealer in physical bullion trading.

Ross has an enviable record within the London Bullion Market in forecasting the gold price over the last decade and is frequently sought by the media for commentary on the bullion markets. Ross has made frequent appearances on TV (BBC, CNBC, CBC) in newspapers (FT. Wall Street Journal) as well as in the newswires (Reuters, Bloomberg and Dow Jones).

e: ross.norman@sharpspixley.com