A rogue gang of fat ladies is parked in the lobbies of the big five gold-dealing banks, and they’re clearing their throats and tuning up. Here’s why: On Friday, researchers announced the London gold fix – the benchmark used since 1919 to set gold’s market price – may have been manipulated for the last decade by the very banks setting it.
Those five banks are Barclays Plc (BCS), Deutsche Bank AG (DB), Bank of Nova Scotia (BNS), HSBC Holdings Plc (HSBC) and Societe Generale SA (SCGLY).This isn't news to gold bugs. We’ve suspected for years that the big gold banks were using the London fix to keep a lid on gold prices. Wall Street scoffed at the suspicions as “tin-foil hat territory.”
But now that research backs up the claims, it’s going to be a lot harder to smash down gold prices. I’d hate to be a big bank with a large short position in gold that suddenly found itself under intense regulatory scrutiny.
The Findings
The research was written by Rosa Abrantes-Metz, a New York University Stern School of Business Professor, and Albert Metz, a managing director at Moody’s Investors Service. The conclusion:
Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behavior and should be investigated.
Bloomberg News reports:
“Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.”
The researchers told Bloomberg:
“There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards.”
Yeah, I’ll bet. No obvious explanation at all.
The London gold fix is set in a telephone conference call twice a day at 10:30 a.m. and 3 p.m. London time. The banks declare how many bars of gold they want to buy or sell at the current spot price, based on orders from clients and themselves. The price goes up or down until the buy and sell amounts are within 50 bars of each other.
That’s when the “fix” is set.
The process is unregulated and the five banks can trade gold and its derivatives throughout the call.
It’s a far cry from how the London fix started nearly a century ago. In those days, dealers met in a wood-paneled room in London and raised little Union Jacks to indicate interest.
But 10 years ago, something changed.
Beginning in 2004, during the afternoon call to set the fix, there were large moves in the price of gold, the researchers found.
Most interestingly, these moves were overwhelmingly in the same direction: down.
“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” the draft report says. “It is likely that cooperation between participants may be occurring.”
I don’t expect the banks to be punished. Banks are never punished, except with laughably small fines. But I do expect the scrutiny to put the kibosh on any potential hanky-panky.
And that will throw off anyone who has the crutch of being able to manipulate prices.
We already saw the price of gold rise 7% in February. So if the price of gold really takes off… and the banks are short the yellow metal… and they can’t manipulate it like in the good old days?
Then, my friends, the fat ladies will well and truly start singing.
What You Can Do
Now is the time to make your shopping list of the best gold miners you want to buy for gold’s big rally… and the biggest may be yet to come. See short-term pullbacks in the gold price for what they are: buying opportunities.
This year could be one of extraordinary opportunity – and profit potential – if you’re holding the right stocks.