Fixing the Fix
What’s in a name? Deutsche Bank have recently withdrawn from their membership of the London Gold Fix and the search is on to find a replacement. You can imagine the Board Meeting at Megabank, when the proposition to buy the seat was put to them: “Fix, fix? Are you mad? We’re still taking the flak for the LIBOR fix!”
Mystique of the Name
Joking aside, I’m sure that the increased regulatory awareness of how prices are discovered will make a number of otherwise possible buyers think twice about joining. Last time a seat was sold (NM Rothschild to Barclays), the market belief is that it went for about £1m, which actually doesn’t seem that much. Of course, it’s difficult to attribute a value to the seat, because the Fixing Members are not the only LBMA-accredited bullion market-makers. There is a perception that membership has prestige benefits, in other words, that it is a marketing tool. That used to be touted as relevant to LME members as well, with the belief – which in the past was undoubtedly valid – that Ring Dealing status conferred a kind of badge of superiority. That’s pretty much gone on the LME, where a large part of the power and influence has devolved to the Category Two members, flourishing their big balance sheets at clients to the detriment of the traditional brokers. I wonder, though, if in fact the mystique of the Fix may still carry the power to attract new players from the East. It would surely be beguiling, from a marketing point of view, to be the first Asian bank to be a member of the London Gold Fix. That’s why there is a desire to have clarification as to whether any new participant needs to be one of the existing market-making members. They would be wise not to insist on that, to let new blood in.
The possible regulatory issues, which I believe may well be a disincentive to many US and European banks, are interesting. The Gold Fix seems to me to be a healthily transparent means of price discovery, and yet there are those who are urging regulators to look at it on the grounds that it confers an unfair advantage on the participants. Somebody has noticed that the Nymex volume tends to increase during the time span of the London Fix. Well, there’s a surprise; during the period when price discovery is taking place, activity on the largest futures exchange picks up. Who would have expected that? The suggestion appears to be that because the fixing members know what is on their orderbooks, they have an unfair advantage, which they are exploiting by trading against those orders on Nymex. But since it’s an open fix, and those orders can change at any moment, and they don’t know what is on any other members’ orderbook, I struggle to understand the problem. But, irrational or not, the flavour of the times is to see – or at least to suspect – underhand activity in financial markets as a matter of course.
German Gold…BaFin Investigates
There is another issue surrounding gold at the moment, which is a bit more wide-ranging than the (perhaps slightly) parochial question of who participates in the Fix. What started as a theme amongst conspiracy theorists is coming more into focus, prompted by an investigation by the German financial regulator, BaFin, into the operation of the gold market. As a result of that, the German press, initially Der Spiegel and Die Welt, has drawn attention to the fact that Germany has been attempting to repatriate some of its gold holdings from the United States. So far, only a tiny fraction has been forthcoming. That may seem a fairly arcane issue – after all, we’re talking about two inseparable allies here – but for historical reasons, going back to the 1920s, gold ownership as part of national monetary stability is important in Germany.
Falling Paper, Rising Physical
This may be one of the concrete signs of a problem which has been swirling around for a while, concerning the way in which Central Banks have for years been leasing out their gold holdings; on the surface, that’s a perfectly reasonable activity. However, it would become a major problem if that leased gold had been transformed by, say, jewellery manufactures and was not available to come back. That then puts an enormous pressure on the available supply of physical gold, creating the situation where the nominal (paper) price can in fact decline, but the pressure on physical delivery – and premium – could shatter the market.
Where these two issues come together is perhaps the fix of the Fix. While I would still maintain that the actual process of the daily Fix is transparent, it’s not necessarily obvious that applies to what may be behind it. And that, I suspect, is why US and European banks will not be queuing up to buy Deutsche’s seat.