Researchers are saying that the infamous London gold fix, where five of the largest banks discussion gold’s price twice every day, is actually market manipulation.
“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” the report indicates. The London fix has been the focal point of controversy in the gold market over the years after research proved that trading around the 3 PM fixing was highly accurate in determining the direction of the price fix. The fixing is supposed to be conducted over a private phone line between Deutsche Bank (whom is actively seeking to sell its membership), Bank of Nova Scotia, Barclays PLC, HSBC Holdings and Societe General.
The report believes that “it is likely that co-operation between participants may be occurring.” What is troublesome, the banks are allow to actively trade gold while opening discussing its market price. The fixing dates back to 1919 and the institutions determine how many gold bars they want to buy or sell at the current spot price based on client orders, as well as their own. The price is then increased or reduced until the buy and sell amounts are within 50 bars (620 kilograms) of each other, which the price is then set.
This unregulated process made traders concerned due to the fact that the fixing entities and their clients have an unfair advantage in the short-term direction of gold, at which act be actively traded during the fixing. Regulators are currently determining the best, most fair practice to price gold. “Abusive behavior can occur in the physical commodity markets which in turn can have an impact on, or be directly linked with, financial market activity and prices,” said the United Kingdom’s Financial Conduct Authority (FCA), while adding that proper oversight is needed.