Today the World Gold Council has convened a meeting of industry participants and experts to discuss a replacement of the 100-year old gold fix that is being investigated City regulators who have already fined Barclays Bank 26 million pounds for abusing the system.
The fix has understandably become unpopular with the fixers. Deutsche Bank resigned in April leaving Barclays, Bank of Nova Scotia, HSBC and Societe Generale running the show.
Libor scandal
In the wake of the Libor scandal almost anything seems possible though in the case of Gold the finger is usually pointed at the central banks who manipulate the price to dampen inflation expectations. The evidence gathered to support these claims is overwhelming but ignored as you might expect when the authorities themselves are doing the manipulation.
The London gold fix works by setting the price at which the gross amount of gold placed on buy orders matches the gross amount of gold on sell orders across all of the member bullion banks. Yet it has become an anachronism as there are electronic prices quoted for gold in many markets around the world.
We are not sure that gross abuse is necessarily taking place in London. The expert speakers at the Dubai Multi Commodities Conference earlier this year largely rallied to its support.
However, anything that even allows a whiff of insider trading to waft through a financial market is not really worth the candle and ought to go. Silver is facing a similar review due on August 14th.
Price surge?
Will this sort of reform be enough to start a price surge for the precious metals? By itself, no. But as a part of a raft of positive developments for gold and silver this is a useful step forward.
Confidence that price setting mechanisms work fairly and accurately are essential to making any market and precious metals are no different from sheep or iron ore in that regard.
On the other hand, if the London price fix encourages market regulators to go further and question the role of the central banks in fixing gold prices then this really could open a can of worms, and that would send prices much higher.