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.
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.