The London Fix
The London spot fix is a daily price per ounce for each of the precious metals (gold, silver, platinum and palladium) determined daily by a brief conference call among the five members of the London Gold Pool (Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale) each business day of the year at 10:30 a.m. and 3 p.m.
The London Gold Fix is the process by which the five biggest participating bullion banks establish a common transaction price for a large pool of bullion purchase and sales orders. When the gross amount of gold on purchase and sell orders across the participating banks match, the price is established.
Participating banks act on their own behalf as well as for individual customers. These customers issue limit orders allowing gold dealers to trade on their behalf at the gold fix price.
The gold fix chairman starts proceedings by declaring a proposed price that is close to the ongoing spot market gold price. Participating banks total all of their buys and sell limit orders. They tell the chairman the net quantity of gold they will buy or sell at that price.
The current London Gold Fix price is set when net effect across the participating banks is in balance.
However, normally it takes a while for buyers and sellers to be in balance. The chairman adjusts the proposed price accordingly, increasing the price when there are too many buyers and decreasing it when there are too many sellers.
An upward price adjustment causes the following:
- Reduced demand when the prospective price exceeds some purchase order limits, causing them to drop out of the pool.
- Increased supply when the prospective price exceeds some sale order limits, causing them to join the pool.
A downward price adjustment causes the following:
- Increased demand as the prospective price drops below some purchase order limits, resulting in an increase in the pool.
- Decreased supply as the prospective price drops below some sale order limits, forcing them to drop out of the pool.
The participating banks will repeat the exercise until they are in balance. This process usually takes 10 to 15 minutes to complete. The longest fixing happened on Black Monday, Oct. 19, 1987, when it took two hours and 15 minutes.
This method is a fair auction method because of the size of the pool.
The good result is that clients often end up buying below their limit and selling above their limit.
Participants in the London Gold Fix earn a small spread of 20 cent per troy ounce premium on the buyers' fix price.
The current Gold Fix price is found in the newspaper, on Teletext services, and online.
The Gold Fix Requires You to Wait for Your Price
With the gold fix, a customer only finds out what he has paid or sold his bullion for at the next fix. This can result in the customer missing either a favorable or unfavorable market move. Conversely, knowing that the purchase price resulted from a notable amount of orders indicates that a fair price was received or paid.
Is the Gold Fix Fair?
Is the gold fix really fair? That is a difficult question to answer. Participating market-making bullion banks dominate the gold fix. In this moving market, financial institutions and fund managers bring waves of buyers and sellers into the market.
A market-maker is an agent and a principal. As an agent, a market-maker trades in gold on behalf of customers. As a principal, a market-maker trades in gold with customers.
For example, if there are 20 gold purchase orders and five gold sale orders, then it is reasonable to conclude that other fixes also have more buyers than sellers. As a result, it is likely that when the chair announces the opening fix price, the market-makers will not rush in as sellers to bring balance to the market. Otherwise, they would be selling into demand at a low price.
As buyers in the market, the market-makers wait before declaring themselves as sellers until the price has risen. The market-maker tricks others by slipping in as a seller in the nick of time before other participants. Thus, the market-maker improves his profits by bluffing at the time of the fix when he thinks that the market is going in a particular direction. This is common in finance for principals who win the order-flow from customers, providing information about the market attitudes.
Who Uses the London Gold Fix?
Official data is never released by the five members of the London Gold Fix. However, it is obvious that huge amounts of gold bullion change hands. Large gold owners, mining companies, and refineries also use the London Gold Fix price to calculate the value of their inventory.
Many central banks use the London Gold Fix price to value their gold bullion stock. Other retail outlets such as jewelers and coin dealers commonly use the London Gold Fix for daily price adjustments.
Gold derivative markets also use the London Gold Fix for pricing of margined positions, such as gold options, gold swaps and futures.
Can I Trade Gold at the London Fix?
In short, the answer is no. The settlement condition of the London Good Delivery bar is 400 ounces of gold, which is beyond most private buyers.
History of the London Gold Fix
The first London Gold Fix was held on Sep. 12, 1919, kick-starting the gold market in London after World War I. Up until 2004, the five-member banks always met face to face at the offices of N.M. Rothschild, the chairman of the London Gold Fix, on St. Swithin's Lane in London.
Rothschild's bank decided to quit the gold market in 2004. The reason the bank gave was that "our income from commodities trading in London has fallen as a percentage of our total income in each of the past five years."
Since then, the gold price has more than doubled. Chairmanship now rotates each year between the five remaining members: Société Générale, Barclays Bank, HSBC Bank USA, Deutsche Bank, and the Bank of Nova Scotia-Scotia Mocatta.
Please note: This article is for informational purposes only. Future performance does not necessarily follow previous price trends. Seek financial advice before making any investments.