In a mainstream media disclosure that
took the gold investment world by surprise, Bloomberg published a
report -
Article Link - last week which contained data from an academic study that
showed that the daily London gold price fixing has been manipulated
for at least 10 years. While this is not new information to many
precious metals investors, it is the first time that an establishment
news outlet has exposed the truth about the widespread and blatant Government-sponsored
manipulation of the precious metals market. It should be noted that the Financial Times also published this report but then retracted and deleted the article.
The London daily gold fix is an event
that has been setting the price of gold twice a day since 1919. With
the advent of computerized market trading and the gold/silver futures
market (1974), it would appear that the London fix is no longer
necessary as a mechanism of "price discovery." As we will
see, the London fix still exists because it is used by the bullion
banks as an overt market manipulation mechanism.
The price "fixing" is
conducted by 5 individuals who work for their respective bullion
banks. These individuals jointly decide what the
"spot" price of gold should be twice a day, once in the
morning and once in the afternoon (London time). They committee is
allowed to communicate with market participants and their respective
banks are permitted to continue trading gold and gold derivatives
while these individuals decide what the price of gold should be. Theoretically this price as "fixed" is determined to be the price which will clear the market of all buy and sell orders up to that point. Theoretically, it provides a "benchmark" price for the spot price of gold. Incredibly, the time of fix occurs during the period of time when the Shanghai Gold Exchange, the largest physical gold market in the world, is closed for the day.
But how can a closed system like this
possibly operate objectively? The gold fix system is inherently
ingrained with the conflict of interest and moral hazard the accompanies
any system governed by collective "judgment." The
Bloomberg News article details a study done by NYU
professors which showed that between 2004 and 2013 large price moves
during the afternoon "fix" were moves lower at least 66% of the
time. In 2010, the large moves were negative 92% of the time.
From their work, the authors concluded
that the market in all probability was manipulated by the banks whose
representatives establish the price fix every day: "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" - Rosa Abrantes-Metz, one of the
authors of the study.
As it turns out, Ross Norman, CEO of
the well-known London-based Sharps Pixley bullion retailer issued a
rebuttal to the Bloomberg article and in defense of the London fix (
LINK).
Ironically, in his attempted defense of the gold fix process, Norman
inadvertently exposes the system's inherent flaws, thereby showing
the reader how the London fix committee can easily manipulate the
market. In fact nearly every point of assertion about, and defense of, the London fix process is embedded with
half-truths or outright lies.
In response to the fact that there are
unusually large moves during the "fix" period, Norman
explains: "the fix is a price discovery process and as such large
buying and selling orders collide here - large moves are therefore to
be expected. In fact, the mere fact that it does move confirms some
differences in opinion over fair value between the clients dealing in
the fix - actually it supports the notion of the integrity of the
process."
This explanation is is patently
disingenuous. Gold trades in either physical form or derivatives
form (futures, forward) nearly continuously during the trading week.
The "price discovery" process occurs inherently with every
buy/sell transaction. To say that it is only at the time around the
p.m. London fix that large orders to buy and sell constitute "price
discovery" is entirely misleading. In a continuously functioning
market, orders of all sizes are executed and "price discovery"
occurs with each trade execution. A committee of five individuals is
not needed and collective "judgment" about what the price
should be is not required.
In his second point of defense of the
London fix, Norman makes these comments: "the fix is used by
official institutions (like Central Banks) and many major miners who
all require an "objective" and published price because they
need to [be] more accountable than say (sic) a proprietary trader.
The spot price for example is neither of objective (sic) nor
published. Selling by miners in size every day and invariably
outweighs (sic) any official buying which is typically large but
infrequent. Hedging or financing for the miners have will often (sic)
link their financial arrangements to the gold fix."
Just as a note, it's interesting that
Norman decided to put quotes around the word "objective."
Clearly the London fix is anything but "objective," since
by it's very nature it defies the objectivity and price discovery
mechanism of a continuously functioning market. I'm not sure why a
"fixed" price needs to be "published" at all. At any given time during the 23 hour trading period of each
business day gold trades in either physical or derivative form
(futures, forwards). Anyone can go online and "discover"
the current trading price of gold.
To be perfectly clear about this, any
price which is determined in the market by a buyer and seller is
inherently more objective and visible than is a price which is
"fixed" by a committee of five individuals saddled with
inherent conflict of interest. Mining companies and Central Banks
are free to use the standard market mechanisms to execute their
trades. To say that a committee operating out of view of the market
can determine an official "spot" price is either
unintentionally disingenuous or an outright lie. If
anything, the London fix process prevents the
true price discovery process of an open and free market.
Norman also claims the London fix conference
call is not private and is open to clients. Do you have access to
this call? Our firm does not. I don't know of anyone who has
access to this call. While the price fix committee of five may have
information about the large buy and sell orders that are about to
"collide" - to use Norman's term - the market as a whole
does not. An efficient market functions most efficiently in its
price discovery process when as much information as possible about
buyers, sellers and size is immediately disseminated to the entire
market. The London price fix system not only prohibits the
dissemination of information that might help the market achieve its
price discovery goals, it leaves the discretion as to the "best"
market clearing price at that point in time up to the committee of
five who may or may not be on the phone with their best preferred LBMA
member clients or their own banks.
Again, to reemphasize this point
because it can not be emphasized enough, the price fix committee
members have de facto conflict of interest by the very fact that the
banks they work for have large capital positions in gold and silver.
Furthermore, while detailed LBMA position data is not made available to the
public, we know that these banks run large net short positions on the
NY Comex. To say the least, the banks have a motivated interest to
see a lower price fix every day.
Norman next tries to defend against
the findings of the study that the price of gold at time of the p.m.
fix is fixed lower a majority of the time - with the statistical
evidence overwhelmingly in support of this conclusion - by explaining
that if London gold dealers (i.e. the bullion banks) "had
consistently shorted gold as maintained" they would have
suffered massive losses.
This assertion is absurd because it
assumes that the big bullion banks are always long gold. Yet, we
know from over a decade of Comex data that the big bullion banks have
run massive short positions in Comex gold futures. We don't know
whether the big banks are net long or net short on the LBMA because
the LBMA does not publish enough information about the big bank forward
contract and bullion positions. In fact, from the size of the
historical net short position of the big banks on the Comex, and the
accompanying trading turnover of these positions, any bank with
access to information about the level of the price fix before the
general market sees it has the ability to net rapid and riskless
trading gains on a daily basis.
Finally, Norman tries to deflect the
issue entirely by opining on the "vested interest" of
Bloomberg in publishing this article and ends by scolding the organization ("shame on you...for lack of journalistic
discretion and judgment...and failure to ask the right questions").
As Norman tolls this bell of scorn and
disdain for Bloomberg News, ironically he's ringing it at himself, as
Norman's disingenuous defense of the LBMA gold price fix
surreptitiously exposes the reasons why the gold fix process is
highly flawed. Indeed, it is a system of price determination which
is susceptible to the moral hazard and market misconduct which
accompany any market system in which price level is determined by a
small committee individuals, all of whom have a high level of
inherent conflict of interest.
One last point, Norman is correct that
Bloomberg fails to ask the right questions. Here's a small sampling
of the right questions: 1) Given that the gold market trades nearly
continuously during the business week, either by auction or computer,
why is the London fix needed at all? 2) Why does the fix occur after the Shanghai Gold Exchange, the worlds largest physical bullion market, has closed for the day? 3) Why are the members of the
price fix committee allowed to be representatives of the big bullion
banks? 4) if #2 is unavoidable, shouldn't the members be from
organizations which do not run capital positions in gold and silver
or stand to benefit from inside knowledge about the price fix? 5)
Why doesn't the LBMA publish more specific and detailed data about
the forward contract and bullion positions of its member banks?