Barclays Plc (NYSE ADR: BCS) was fined $43.8 million today (Friday) by a U.K. regulatory agency as part of a gold price fix episode back in 2012 - a rare moment of public exposure for the bigger issue of gold price manipulation.
In the Barclays incident, trader Daniel Plunkett was able to evade weak internal controls to fix the price of gold in order to avoid a big payout. If gold closed above $1,558.96 that day, Barclay's would have owed $3.9 million to one savvy customer who had bet gold prices would rise.
Plunkett was able to do this because Barclays is one of the world's banks involved in the twice-daily gold price fix exercise. Not all investors might be aware that the benchmark price for gold is determined not by market trading but by just four banks - HSBC Holdings Plc (NYSE ADR: HSBC), Societe Generale SA (OTCMKTS ADR: SCGLY), Bank of Nova Scotia (NYSE: BNS), and Barclays - in two conference calls at 10:30 a.m. and 3 p.m. London time. (Deutsche Bank AG (NYSE: DB) was also a member but resigned its seat in April and stopped participating as of May 14.)
The "gold price fix" practice started in 1919 and serves the purpose of allowing gold to be bought and sold by miners, jewelers, and central and commercial banks at a single price.
It also let Plunkett manipulate the price just below the level where he'd take the big hit.
"A firm's lack of controls and a trader's disregard for a customer's interests have allowed the financial services industry's reputation to be sullied again," said Tracey McDermott, director of enforcement and financial crime for the Britain's Financial Conduct Authority (FCA), which imposed the fine.
Here's how he almost got away with it...
How a Desperate Trader Exploited the Gold Price Fix Process
Plunkett knew he was in trouble on June 27, the expiration day of his customer's bet. Gold prices closed at $1,573.50 that day, $14.54 above where the customer would get his big payoff, and Plunkett's trading book would get dinged by $1.75 million.
Plunkett, a director on Barclays' precious metals desk, started placing orders to try to drive gold prices down. He also sent an e-mail to colleagues on the evening of June 27 saying he was hoping for a "mini-puke to 1558" the next day.
During the 3 p.m. phone call on June 28, Plunkett placed large orders, withdrew them, and placed them again to influence the price of gold, according to the FCA.
By the time the 3 p.m. gold price fix call ended, the price was set at $1,558.50 - $0.46 below the threshold that Plunkett was trying so desperately to avoid.
No one at Barclays noticed, but the customer did. Suspecting foul play, he immediately complained. Following an internal investigation, Barclays did pay the customer all he was owed.
The FCA then conducted its own investigation, which resulted in today's $43.8 million fine for the bank. The FCA also fined Plunkett 95,600 pounds ($161,000) and banned him from trading.
While investors said the Barclays gold price fix scandal was an isolated incident - and in Barclay's case, maybe it was - it shows just how easy it is for major banks to manipulate the price of gold.
And gold price manipulation is more common than most investors may realize...
The Real Gold Price Fix Is Much Worse
First of all, just because Barclays got caught doesn't mean they are the only member of the gold price fix group that's guilty.
According to a February story in the Financial Times - which mysteriously vanished from the FT's website two days later - a consulting agency recently discovered a suspicious pattern of gold price manipulation by the gold price fix banks.
The story (resurrected by our friends at ZeroHedge) notes that a study by consulting agency
Fideres indicated that gold prices were manipulated 50% of the time between January 2010 and December 2013.
Fideres found that gold prices would often rise or fall right before a conference call, move again just as the call ended, and then quickly reverse, which the agency said hinted at "collusive behavior."
"It is fair to say that economic work suggests there are certain days when [the five banks] are not only tipping their clients off, but also colluding with one another," Daniel Brockett, a partner at law firm Quinn Emanuel, told the FT.
If true, such collusion would harm many investors, including pension funds, hedge funds, commodity trading advisers, and futures traders.
"When the banks fix the price, the advantage they have is that they know what orders they have in the pocket. There is a possibility that they are gaming the system," Alasdair Macleod, head of research at GoldMoney, a dealer in physical gold, told the FT.
For retail investors, evidence of gold price manipulation simply means they should not trust what any of the world's big banks say about gold.
"If you've ever suspected gold prices are being manipulated, you're not alone - and you're right, they are," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Bigger firms like JPMorgan, Goldman Sachs, PIMCO, or any of a dozen other behemoths simply release a 'research report' that is interpreted as gospel by the mainstream media and swallowed hook, line, and sinker by millions of unsuspecting investors as a reason to buy or sell."
Knowing this is going on is vital for retail investors, not just so they don't get snookered by the Wall Street heavyweights, but so they can adjust their own strategy accordingly.
Fitz-Gerald said dollar-cost averaging - buying a set dollar amount of an investment at regular intervals - is one tool people can use to avoid becoming a Wall Street patsy.
"Dollar-cost averaging forces you to buy more when the price is low and less when the price is high," Fitz-Gerald said. "Maybe you can't compete with the big banks, but you can beat them at their own game."
It's worth noting that the banks are almost always trying to artificially drive gold prices down while the market wants to push them up. This game can't last forever, so it makes sense for retail investors to buy gold now. Here's Keith Fitz-Gerald's gold investing "cheat sheet" for 2014...
- ZeroHedge: Here Is the FT's Gold Price Manipulation Article That Was Removed
- The New York Times: Barclays Fined $43.9 Million in Setting Price of Gold
- The Guardian: Barclays Fined £26m for Gold Fix Failings