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How Are Gold Prices Fixed?

By Pramod JaiswalCommoditiesFeb 07, 2017 07:24AM ET
How Are Gold Prices Fixed?
By Pramod Jaiswal   |  Feb 07, 2017 07:24AM ET
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Human affinity for the yellow metal has been legendary, with historical wars having been fought and many conspiracies having been hatched to lay hands on perhaps the most lucrative metal of all. In the modern world, transparency in trade and the the world economy relies heavily on gold. It was in fact, the de-facto gold standard that determined the economic health of a country till some years back. Gold is still considered a safe ‘currency’ by nations.

For trade and exchange of gold amidst lenders, borrowers, traders, and financial institutions, it is therefore necessary to have a system of evaluating the gold and reaching a standard reference that all must adhere to. Gold, after all, is a metal. To determine its value in monetary terms is a tricky affair. A gold fixing process achieves this – that determines the rate of gold and publishes the same for all stakeholders. This is called the gold rate.

Factors Affecting the Price of Gold

This is an interesting play of speculation and actual supply and demand. The rate is governed by factors like central banks, IMF, jewellery and industrial demand, short selling, security against financial pressure and national emergency, amongst others. Gold is also used as a hedge against the movement of the US dollar (currency standard of the world), and the gold rate moves in a direction opposite to the change in the dollar’s strength.

How is it determined?

Since gold rate is prone to fluctuations and varied interpretations, it is a complex process and needs to be calculated carefully. Earlier, it was determined for the globe by London Gold Fix, but on March 20, 2015, this was replaced by the London Bullion Market Association (LBMA) Gold Price, which is administrated by ICE Benchmark Association (IBA).

The fixing process is a daily process, where participating bodies tend to reach an agreement for buying or selling prices. This is done to control the market conditions within a level, to balance supply and demand.

IBA conducts and auction electronically which is administered, traded, and settled physically and digitally with known and anonymous bids in US dollars, and then published digitally in in real-time.

There are participating banks currently called the market makers. The lead participant proposes a spot price, which is the current market price at which the gold can be bought or sold immediately. All the participants try to simulate their transactions using this spot price. Gold transactions can be calculated for their proprietary trading, or on behalf of their clients or both. They take physical gold and ‘paper gold’ (gold trading contracts) into account and then offset the total against the proposed value.

Each bank comes out with a single value in ounces of gold that they wish to buy or sell. The total of all values from market makers is determined. If it comes to zero (0), the rate is fixed. Else, the chair proposes another value and adjustments are made and the entire cycle is repeated till a hit is received. This is the fix published for all.

Frequency of Fixing the Gold Rate

The LGMA Gold Price is usually fixed two times in a day, at 10.30 am and 3.30 pm London time. Gold trading is done around the world, and thus has longer hours starting from Sunday 6:00 am EST (when Japan markets open) to Friday 4.30 pm EST (when US markets close). There is a closing time -from 5:15 pm to 6:00 pm EST, a 45-minute window from Monday to Friday daily, when the trading is closed. Yet, there is no fixed closing price for gold as the trading happened globally 24/7.

How does it percolate down to each country?

Every nation has a standardized body which carries out the gold fixing rate in coordination with LBMA. Similarly, gold rate in India is determined by Multi Commodities Exchange (MCX). This looks at the Indian and International Markets, market conditions (inflation and deflation).

It all adds up

The LBMA thus synchronizes up with the regulatory bodies of many nations and governments for their domestic conditions that finally provide important inputs in regulating the price of the gold per unit.

How Are Gold Prices Fixed?
How Are Gold Prices Fixed?

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