Profit from the End of This Secret "Fix"

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For nearly 100 years the London gold price fix has been widely used as an industry benchmark.

Its goal was to determine a price for gold that bullion dealers, jewelers, miners, and central banks could use to value their metal.

But it's a process that may have allowed for manipulation, something a recent Financial Times article highlighted thanks to new research.

That story was quickly pulled… but it hasn't disappeared entirely.

Screenshots of the article have surfaced, and they point to well-researched backing of a true "fix"…

Here's what's really going on, and what you need to know…

How Gold Prices Are Set… In Theory

Back in 1919, a private corporation called The London Gold Market Fixing Ltd. was established, and member dealers met daily in Rothschild's London offices.

Today, it's a corporation owned by just five bullion banks: Barclays, Deutsche Bank, Bank of Nova Scotia, HSBC, and Société Générale, which currently holds the rotating chairmanship.

Here's how it works… or rather is supposed to work.

Twice a day, at 10:30 a.m. and 3:00 p.m. London time, the gold price is fixed on a conference call that can last anywhere from 10 minutes to over an hour. Each bank indicates the number of gold bars it, along with its clients, wishes to buy or sell at the current prices. The price gets adjusted (up or down) until the point where the available buy-and-sell amounts are within 50 bars, and the price is fixed.

But it's a process that goes completely unregulated.

And that makes it attractive to manipulate… irresistibly attractive, apparently.

The Evidence Is Plain

Two separate research papers think so.

New York University's Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody's Investors Service, recently wrote a draft research paper indicating that there are unusual trading patterns near the 3 p.m. London gold fix.

In the report (not yet submitted for publication), they say "The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality. It is likely that co-operation between participants may be occurring."

As part of their research, Abrantes-Metz and Metz looked for irregular gold spot price action between 2001 and 2013. They noted that sudden spikes often occurred during the 3 p.m. call but not the morning call, between 2004 and 2013.

What's most interesting is that these price spikes were down two out of three times during six of the years in that nine-year time span, and in 2010 large down moves happened during the afternoon fix a full 92% of the time.

A separate study draws a similar conclusion.

According to research by consulting firm Fideres, gold price behavior during and immediately after the London gold price-fixing calls suggests possible manipulation 50% of the time between January 2010 and December 2013 (as indicated in the Financial Times article, Gold Price Rigging Fears Put Investors on Alert).

If you think it's not possible, think again. London has a penchant for this kind of conduct.

Join the conversation. Click here to jump to comments…

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. DAVID | March 24, 2014

    Reading the gold price fix in London by these five banks. What do you interpet this to the gold spot and other precious metals spot value in the coming days? I am a silver invester and would like to know your thougths on this subject.

    • Tom Flynn | March 25, 2014

      David – Thanks for reading. I ran this past Peter and here is his response:

      Hi David. If there is a major overhaul of the way
      The gold and silver prices are determined, allowing for market forces to do their job,
      Then I expect that to help support much higher prices.
      But any investigation and changes will not happen overnight.
      I’d expect it to take months or even a couple of years. Meanwhile
      The fundamentals for the precious metals are likely to keep improving.

      – Peter Krauth

    • Jin | March 29, 2014

      should I invest in more silver?

      Jim

  2. Paul D | March 24, 2014

    You said:
    "What's most interesting is that these price spikes were down two out of three times during six of the years in that nine-year time span…"
    What that says is that 2/3 of 6/9 of the time the price spikes were down, which means
    2/3 x 6/9 = 12/27 = 4/9 of the time the spikes were down. The first thing I did was check my calendar. Nope, it's not April first. Maybe this guy is serious. That's your data?

  3. fallingman | March 24, 2014

    The London fix is the least of the manipulation. Look at the Comex dumps of hundreds of tons of paper gold in seconds over and over again. Got another one today.

    This market is completely rigged and no "regulators" or law enforcement agencies do anything to stop the suppression, because the Central banks are behind it. It's the criminal governments and their criminal central banks who ordered the suppression. They're the ones…the issuuers of paper…who benefit from it. They have no incentive to stop it and every incentive to allow it to continue.

    Never expect a cop to arrest himself

  4. Ian | March 24, 2014

    The maxim "you cannot rig an active market" remains true. What you see happening in commodity markets and even the FX market is the shafting of the lazy man as a result of his laziness. Allow me to explain, I have a lifetime of commodity and Fx trading experience of this factor at work. Somebody who is not a full time trader in the exchange to be used needs to agree a price every so often, perhaps daily, for a portion of his exposure. He gets fed up with calling his trader every day and says. Can we trade 1/20 of my monthly needs at the same time every day? Sure says the trader we will use the 4pm fix which you can see in historical data. That price can be rigged if the trader can aggressively bid up 50 units to raise the price at 4pm and at that price trade, off the market, 500 units. Which he can then cover gradually on the market before or after the fix. In some markets, notably rubber, huge physical quantity is price fixed on the basis of an exchange close price which may not have traded a single tonne that day.

    To stop it happening to you is simple, make the call away from the fix time get the spread and stay on the line while it is dealt. Otherwise pay the lazy man's premium.

    • Allan | March 30, 2014

      Ian, you have narrow view from a perspective of years of trading. Your view is that those not doing what you did is "lazy"! Not so. They (we) probably work in a way that is much more productive for the benefit of humanity. I have long felt too many are using MY money (which I have exchanged for my personal efforts) , moving it here, changing it there, for their own profit which costs ME!
      Money (it used to be only gold) is a means of exchanging my labour and effort, for the efforts of someone else. Banks should be just a safe place to keep it until I need it.
      I think a complete change of the 'system' is necessary, or a complete collapse of society is inevitable. I am – always have been – an advocate of enterprise and free trade, but I think money should be excluded. How I do not know, but bitcoin opens ones eyes to possibilities. I do not see it as the answer – its creation and its speculative trading I cannot support as it follows the same pattern as 'money'.

  5. JohnnieD | March 29, 2014

    So, the birth of the fixing combine coincided with the consolidation of the first ever successful Communist Revolution. The immediate consequence of, was the deliberate flushing, stripping, of gold, silver and precious jewels from Russian churches. In addition private wealth, often including massive troves of same, primarily gold caches were confiscated and used to fund the immediately economically failing social experiment. All of central Europe and Merry old England itself were host to inspired, growing Communist labor movements. In the wake of WW1 Kings had fallen, Empires evaporated, economies floundered and the extreme wealthy. Todays so called Super Rich, the 1% of the 1% who control everything moved to protect their interests and thwart the ambition of the rising International Revolutionary Marxist-Leninist Movement. It worked…so well they continued on with it right up to the now. Why is this such earth shaking news and why would you expect it to ever be any different?

  6. eric taylor | March 29, 2014

    World Bank whistle blower Karen Hudes believes that the global banking network has been hiding gold reserves around the world in amounts that dwarf the official figures available to the general public. If this gold were to come out of hiding, she claims much of it was illegally confiscated by various interests over the years, the supply & demand would be severely upset. Little to no industrial use of gold leads me to put greater faith in silver, but only time will tell?

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