Gold Fix
The London Gold Fix
The Gold Fix Mechanism
The London Gold Fix involves gold dealers from London's five biggest bullion banks establishing a common transaction price for a large pool of purchase and sale orders. They do this twice each business day - first at 10:30am (the Morning Fix) and then again at 3pm (the Afternoon Fix).
The participating bullion banks will be acting both on their own behalf and for those customers of theirs who have issued limit orders for them to trade at the London Gold Fix price. No-one knows what the Gold Fix will be before it is declared.
The Gold Fix establishes the price at which the gross amount of gold on buy orders matches the gross amount of gold on sell orders - across all the participating banks.
The Gold Fix Chairman will start the fixing process by declaring a price - usually very near the ongoing spot market gold price.
Assuming this price the participant banks aggregate all the limit orders they have received - both buys and sells - and declare to the Chairman the net quantity of gold they would buy, or sell, at the proposed price.
If the net effect across all the participant banks is in balance, then that price will become the current London Gold Fix price. More commonly the buyers and sellers are not immediately in balance. Then the Chairman will adjust the proposed price, upwards if there are too many buyers, and downwards if there are too many sellers.
An upwards price adjustment from the chair will cause
- The prospective gold fix price to exceed some of the purchase order limits, which causes those orders to drop out of the pool and has the effect of reducing demand, and
- The prospective gold fix price to exceed some of the sale order limits, which causes those orders to come into the pool and has the effect of increasing supply.
An downwards price adjustment from the chair will cause
- The prospective gold fix price to drop below some of the purchase order limits, which causes those orders to be included in the pool and has the effect of increasing demand, and
- The prospective gold fix price to drop below some of the sale order limits, which causes those orders to drop out of the pool and has the effect of decreasing supply.
Using the adjusted price the participating banks will try again - and they will repeat this until they come into balance.
In this way that large pool of orders overhanging the market will be executed at a common price. Because the pool is large the perception of those who buy and sell gold through the London Gold Fix is that it is a fair auction method.
Notice that clients will frequently buy under their limit, or sell above it - a nice result.
There is a small spread, because a 20 cent per troy ounce premium is applied on the fix price to buyers. This is how the participants earn the money which keeps the fix going.
The fix price is published widely in newspapers, on the internet and on teletext services, and is a good guide to the value of gold at that instant. On the internet you can see it at www.lbma.org.uk and at www.wgc.net.
Martyn Whitehead, director of commodities at Barclays Capital and vice-chairman of the London Bullion Market Association
says :-
"Normally it's a 10 or 15-minute process, but it can take up to half an hour. The longest fixing actually took place back on 19th October 1987 - Black Monday. The London Gold Fix took two hours and 15 minutes to reach agreement that day." That was the day when the US stock market dropped 23% of its value.
The Gold Fix requires you to wait for your price
Sometimes it is thought a problem with the gold fix that the customer has to wait until gold is next fixed to find out how much has been paid or received for bullion. This might well cause a purchaser to miss a market move (which could of course be either in his favor or against him).
On the other hand the knowledge that the price paid was the result of a substantial number of orders in balance means that it is known that a fair price has been paid - or received.
Is the Gold Fix fair?
So is the gold fix as square as it seems at face value? It is not easy to answer, but it is easy to show the sort of thing which could happen, and which in modern trend-following marketplaces might indeed be regular.
The gold fix is dominated by its participating market-making banks.
Against the background of a moving market the herd mentality of modern fund managers and financial institutions tends to bring buyers or sellers into the market in waves.
Each of the market makers operates both as an agent, trading gold on behalf of its customers, and as a principal, trading gold directly with its customers. So if one of them has 18 gold purchase orders and only 4 gold sale orders from customers it is not an unreasonable guess that the other fixers have a similar excess of buyers. Then it is likely that at the opening price of the fix - declared from the chair - the market makers will avoid rushing to declare themselves as sellers to bring the market into equilibrium. Indeed they'd be pretty daft to do so, as they'd be selling into demand at too low a price.
With buyers coming to the market the market-makers art is to hold off from declaring as a seller until the declared price has been raised significantly - and then to nip in just before the other participants declare as willing sellers too. In this way the fix market makers play what amounts to a twice daily game of high stakes 'spoof'.
So what does this mean in practical terms? Nothing new! A gold fix participating market-maker can improve his profits by working his book well at the fix, and by being a good 'spoofer' when he suspects that the market is awash with outside orders in a particular direction. This is the same for any financial trading principals who have won what traders call 'order-flow' from customers. That order flow provides information about the attitude of the market - and that is very useful.
Who Uses the London Gold Fix?
The five members of the London Gold Fix never release official data, but it's clear that huge amounts of gold bullion can change hands at the fix price.
The gold price set at the London Gold Fix is also used by large gold owners, including refineries and gold mining companies, to value their inventories.
Most central banks, such as the Bank of England, rely on the PM Fix to put a price on their stock of gold bullion. Many retail outlets, such as gold coin dealers and gold jewelry manufacturers, also use the London Gold Fix to adjust their prices once a day.
The London Gold Fix is also used by gold derivative markets to put a price on various margined positions such as gold futures, gold swaps and gold options.
Can I Trade Gold at the London Fix?
Unfortunately the Gold Fix is not easily accessible to the general public. The problem is that the dealers are concerned with wholesale order sizes and few will open accounts for private individuals, and in any case the settlement condition is the London Good Delivery bar. At 400 ounces these are too rich for most private buyers.
For private individuals who do want to trade at the fix you actually can, through BullionVault. You will need to register your account on-line, and fund it with sufficient cash to buy at least 400 troy ounces (a whole bar of the standard size). Unfortunately the fix is an off-line auction, so having funded you will need to contact BullionVault by phone (+44 (0)20 8600 0130) during London office hours.
If you want to buy a smaller amount of gold - there is no minimum - at close to the London Gold Fix price then you can do so on-line at BullionVault.com.
- Go to BullionVault
- Highly recommended further reading about the operation of the gold markets. Specially for private buyers.
- Register for a BullionVault Account and get a free gram of gold in our Swiss vault.
History of the London Gold Fix
The London Gold Fix was first held on 12th Sept. 1919 to kick-start London's gold market after the end of the First World War.
For 85 years until 2004, the five member banks of the London Gold Fix would meet face-to-face at the offices of N.M.Rothschild, erstwhile chairman of the Gold Fix, on St. Swithins Lane in the City of London.
Rothschild's bank chose to quit the gold market in 2004, explaining that "our income from commodities trading in London has fallen as a percentage of our total income in each of the past five years Link to news article".
The gold price has more than doubled since then, and without Rothschild's the chairmanship rotates annually between the remaining five members – the Bank of Nova Scotia-Scotia Mocatta, Barclays Bank, Deutsche Bank, HSBC Bank USA, and Société Générale.