You hear or read the gold prices every day, but do you know how they are set
and who sets them? The primary precious metals’ prices are set in London by one of three organizations. Let’s concentrate on the group behind the gold
fix, The London Gold Market Fixing Ltd (TLGMF), which is comprised of the
five largest bullion banks.
Each weekday at 10:30 am and again at 3 pm, (London time), the five
members conduct a conference call to set the fix and determine a price for
contracts between members of the London bullion market. In turn, the fix has become the primary benchmark for pricing the majority of gold products and is the price used most often in over-the-counter gold bullion transactions.
At the beginning of each gold fix call, the
chairman declares a gold price, generally near the current gold spot price. The other four members then relay this price
to their customers who then declare themselves buyers or sellers at that price.
If both buyers and sellers are identified, the members are then asked to declare the number of bars they wish to trade.
If at the opening price there are only buyers
or only sellers, or if the numbers of gold bars to be bought or sold does not balance, the chairman moves the price and then the members consult their customers until a balance is struck between buyers and sellers (within 50 gold bars of each other). When this balance is achieved the Chairman announces that the price is fixed.
The History of the Fix
Why London? Historians trace London’s dominance of the bullion market back to around 1671 when Moses Mocatta arrived from Amsterdam to establish himself as a merchant. His primary business was diamonds but that changed to bullion over the years. In his book, “The World of Gold,” Timothy Green quotes East India Company records from February 1676 that state ‘by cash of Moses Mocatta for freight on 75 ounces of gold on their ships “Nathaniel” and “Society” – £6′. Thus the oldest member of TGLMF was launched.
The first actual “fixing” took place on September 12,1919, among the five principal gold bullion traders and refiners: N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price then was four pounds 18 shillings and ninepence (GBP 4.9375) per troy ounce. The New York gold price was $20.67 per ounce. Although the London fix continued to be in sterling for almost another 50 years, what really counted was the dollar price of gold bullion, as the dollar gradually replaced sterling as the world’s leading reserve currency.
The bids were made by telephone in the first few days and then the members decided to conduct face-to-face meetings at the Rothschild offices in New Court, St Swithin’s Lane. (The Fix changed back to a teleconference on May 5, 2004.)
A tradition of the London Gold Fixing was “the flag.” If a member wanted to pause the proceedings, they could raise a small Union Flag on their desk. When the switch was made to the telephone fixing system, members started
requested a pause by saying the word “flag.” The chairman closes each
session with “There are no flags, and we’re fixed.”
In the1980s, the elevated level of activity and profitability in the gold market
sparked global attention and attracted a surge of international players to
London. This growth, combined with the introduction of the Financial Services
Act in 1986, led to the creation of the London Bullion Market Association (of
which Dillon Gage Metals is an Associate) in 1987.
The current five participants in the TLGMF, who must be members of the London Bullion Market Association, are:
- Scotia-Mocatta — successor to Mocatta & Goldsmid and part of Bank of Nova Scotia
- Barclays Capital — Replaced N M Rothschild & Sons
- Deutsche Bank — Owner of Sharps Pixley, which was a merger of Sharps Wilkins with Pixley & Abell
- HSBC — Owner of Samuel Montagu & Co.
- Société Générale — Replaced Johnson Matthey and CSFB as fifth seat