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Profit from the End of the Secret Gold Price "Fix"

Commodities / Gold and Silver 2014 Mar 24, 2014 - 02:56 PM GMT

By: Money_Morning


Peter Krauth writes: 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.

A Dangerous Precedent Has Already Been Set

Abrantes-Metz has seen this kind of questionable behavior before. In 2008 she published the "Libor Manipulation?" paper, which helped expose manipulation of the London Interbank Offered Rate. Libor is the rate banks charge each other and is used to gauge the general health of the financial system. It's also used in U.S. derivatives markets, as well as mortgages, student loans, etc.

Libor is a benchmark for nearly $350 trillion in worldwide derivatives. So manipulating Libor has allowed participating institutions to profit from trades and sometimes gave the impression they had better creditworthiness than they did in reality.

Already $6 billion in fines have been handed out in the Libor scandal... so far. And the FDIC has just announced it's suing 16 of the world's largest banks for their roles in this mess.

But wait, there's more...

Currency trading is a $5.3 trillion-a-day market. Right now, the world's largest currency trading banks are being investigated for having potentially colluded for 10 years or longer. They're suspected of having rigged and manipulated daily foreign exchange benchmarks and front-running client orders.

If these megabanks manipulated Libor, and perhaps currencies, why stop there?

Gold is a $20 trillion market, which of course leaves plenty of room for profits, legal or otherwise.

Now there's news that Deutsche Bank, one of the fabulous five London gold price fixers, has decided it will withdraw from the panel and may have hired consultants to review its role in the gold price fix.

Meanwhile, Britain's Financial Conduct Authority and Bafin, Germany's financial markets regulator, are investigating the potential manipulation of gold prices.

That's prompted U.S.-based AIS Capital Management to file a lawsuit against the five gold price fixing banks. They allege a conspiracy on the banks' part to manipulate gold prices for their own benefit.

Abrantes-Metz told the Mail & Guardian, "The structure of the benchmark is certainly conducive to collusion and manipulation and the empirical data are consistent with price artificiality."

The Spike Could Be Drastic

If the London Gold Market Fixing process was in fact manipulated, it may have contributed to gold price suppression. Time will tell.

Should this process be revamped, it could mean proper market price discovery and potentially higher gold prices from here. And that's likely to benefit both gold and gold-related stocks.

Bullion's already climbed about 15% from its December intraday low.

Since last fall, I've added five new precious metals plays to the Real Asset Returns portfolio, with gains ranging from 4% to 40% in a few short months.

Remember, gold and gold stocks are in the midst of a secular gold bull market that's going to be one for the record books.

Odds are good a century of London Gold Market Fixing may be coming to an end.

So might the opportunity to buy gold at a "fixed" price.

Source :

Money Morning/The Money Map Report

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