While we are waiting for the details on the European Central Bank’s quantitative easing program (will be published on Thursday) and the U.S. non-farm payroll report (will be revealed on Friday), it is worth analyzing a piece of news which passed almost unnoticed: the long-established London Gold Fix is going to be replaced by the new electronic LBMA price-discovery process on March 20. Why do we believe that all gold investors should be aware of that fact?
When we first read about the coming end of the London Gold Fix, we could not believe it. It is (still) the most important global benchmark for gold prices in the world, being in operation since 1919. We do not know whether the approaching launch of the new gold pricing mechanism will be a genuine game-changer, but it definitely means something. What is this all about? In short, the gold benchmark will be set via an electronic platform managed by the ICE Benchmark Administration. According to the official statement:
“IBA will operate a physically settled, electronic and tradeable auction process. The price formation will be in dollars and prices will continue to be set twice daily at 10:30 and 15:00 (London time) in three currencies: USD, EUR and GBP. Within the process, aggregated gold bids and offers will be updated in real-time with the imbalance calculated and the price updated every 30 seconds until the buy and sell orders are matched. Participants, as well as sponsored clients, will be able to manage their orders in the auction in real time via their desktops.”
The London gold price will therefore be no longer set through a private arrangement among just four members of London Gold Market Fixing Ltd. (at present, Bank of Nova Scotia-ScotiaMocatta, Barclays Bank PLC, HSBC Bank U.S.A., and Société Générale SA).
What are the possible consequences of this replacement for the gold market? First, it should bring more transparency to the market. We are not claiming that banks used to meddle with the gold market; however the change is coming after a big investigation into a number of global benchmarks set behind the closed doors, like the rigged Libor. Second, more participants will be involved into setting the benchmark price of gold. Probably 11 entities will provide the data used to establish the daily gold price. More participants should provide larger transparency: the more players, the harder to collude to set the price.
Third, the new gold price mechanism may be positive for the gold prices. Why? A few Chinese banks (three of them are already LBMA members) are likely to participate in setting the gold prices. It means that Chinese clients will have a more direct influence on the international price of gold. This is important, because the Chinese are considered to be more bullish on gold. It is an open secret that the gold prices trade on average at higher price levels during the Asian trading hours than during the London and New York trading hours.
The key takeaway is that the new gold price mechanism is going to be launched on March 20, and it should bring more transparency to the market. It may also strengthen the gold prices. It will rather not cause a parabolic spike in the gold prices, however it may provide a long-term support by ensuring larger transparency and stability and, thus, attracting more value-oriented clients to the gold market.