Recently lawyers appeared in a US Federal Court in order to co-ordinate an action against five banks on the London gold fix panel, in relation to the alleged price fixing of gold.
A former precious metals and precious metals derivatives trader, Kevin Maher, is leading the suit on behalf of investors who held or traded gold and gold derivatives that were settled based on the London gold fix from 2004 to date.
The London gold fix is a traditional model, and has been largely unchanged as a process since 1919, although the names on it have, with the current panel comprised of Barclays, Scotiabank, HSBC and Société Générale. Deutsche Bank has only last month left the panel. Eyebrows could be raised at this, given Deutsche Bank’s recent actions on corrupt practice and fixing, and it is currently negotiating a fine with the US authorities. They wish to pay only $1billion, with the US authorities seeking close to $16billion.
The price of gold is still to this day fixed during a telephone call between the panel banks. In the call, the chairman gives an opening price to the other members who then relay this price to their customers. The banks receive orders based on this price and then declare themselves buyers or sellers. If there are both buyers and sellers at that price, panel members are asked to state the number of bars they wish to trade. If there are only buyers or only sellers at the opening price, or if the numbers of bars to be bought or sold does not balance, the price is moved until a balance is achieved.
The US action alleges that the process by which the price of gold is fixed is flawed for two reasons: it is unregulated and the member banks are able to trade gold during the process.
Maher has stated publically that his motivation in bringing the suit is the perceived lack of oversight from the US government and regulators on this issue. The merits of the suit remain to be seen, and the panel banks will have to wait to see if the suit sparks the interest of the regulators, or forces them into action.
In the UK there are reports that the FCA is conducting a preliminary review of the gold benchmarks, of which the London gold fix is one. The reports suggest only an interest at this stage. However the issue is clearly on the UK regulators’ radar.
Will the London Gold Fix become a scandal to rival Libor or FX? Whatever happens, the next few months will see the practice of the fixing of various commodity prices increasingly under the spotlight, from both the regulators and the public, as to the next saga in the practice of the banks.