Study Reveals Potential Manipulation of Benchmark Rate for Gold

Five banks overseeing the century-old benchmark rate for gold are suspected of working together to manipulate the London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, reports Bloomberg.


Citing a draft research paper written by New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, Bloomberg reports that Barclays Plc (BARC), Deutsche Bank AG (DBK), Bank of Nova Scotia, HSBC Holdings Plc (HSBA) and Societe Generale SA (GLE) may have been manipulating the benchmark for a decade.


Authorities around the world are already examining the $20 trillion gold market for signs of wrongdoing.


Every day, the five banks meet to agree the price fix twice a day at 10:30 a.m. and 3 p.m. London time, according to the website of London Gold Market Fixing, where the results are published.


Immediately prior to the commencement of the fixing the chairman determines what is considered to be the then prevailing US Dollar spot price for loco London gold in the market and such price will be used as the opening price for the fixing process.


Firms declare how many bars of gold they want to buy or sell at the current spot price, based on orders from clients and themselves. The price is increased or reduced until the buy and sell amounts are within 50 bars, or about 620 kilograms, of each other, at which point the fix is set.


Traders relay shifts in supply and demand to clients during the call and take fresh orders to buy or sell as the price changes, according to the website of London Gold Market Fixing, where the results are published. The fixing process is unregulated and the five banks can trade gold and its derivatives throughout the call.


Abrantes-Metz and Metz observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.


Large price moves during the afternoon call were also overwhelmingly in the same direction: down.


The authors also found that in 2010, large moves during the fix were negative 92 percent of the time.


There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz told Bloomberg.


“This is a first attempt to uncover potentially manipulative behavior and the results are concerning,” she said. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing. The results are consistent with the possibility of collusion.”


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