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The cozy little world of gold trading is getting less comfortable. A handful of bankers in London currently set the world standard for gold prices, a practice that started in 1919 and is widely used by governments, miners and brokers to buy and sell the precious metal and its financial derivatives.
But regulatory probes have shone an unwanted spotlight on the benchmark known as the London gold fix, and prompted calls for change.
The five banks that set the standard – Barclays, Bank of Nova Scotia, Société Générale, Deutsche Bank and HSBC – have been hit by multiple lawsuits from investors alleging they colluded to rig the price for their own benefit. Deutsche Bank, which gave up its seat on the gold-ixing panel, said the lawsuits had no merit. Barclays, SocGen and HSBC had no comment, and Scotiabank could not be reached.
“This is a setting that is very easy to be manipulated either by one individual bank or by a group of them,” said Rosa Abrantes-Metz, an associate professor with New York University’s business school, whose research identified a series of unusual trades before the gold benchmark was announced. “It completely lacks oversight and involves a very small group of competitors, so it is easy to co-ordinate behaviour,” she said.
After accusations of interest rate rigging surfaced two years ago, regulators and investors started questioning the integrity of all benchmarks, including those used for oil, silver and foreign exchange prices.
Because spot gold is traded around the clock, the London gold fix is used as a benchmark similar to a publicly traded company’s closing price on a stock exchange. But it appears woefully out of date in a world where material information is disseminated on Twitter and retail investors can monitor stock prices online.
Not much has changed since the early 1900s, when five bankers from the largest bullion houses used to convene at the Rothschild headquarters in London at 10:30 a.m. and 3 p.m. to determine the benchmark.
The bankers still get orders to sell and buy gold bars from their clients and their own accounts. They then try to match orders until there is an agreed upon price and that becomes the global benchmark.
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