Gold market changes its price system

Gold price formation will tend to be more transparent.

Javier Santacruz. 24/03/2015
Gold nuggets

The new daily system to determine gold prices in the London market was established last Friday after several months of preparation. This new system, based on a benchmark electronic index, will follow being the reference to set bullion prices around the world (Gold Official Reserves, miners, Public mints, etc.) and it will be denominated as “LBMA Gold Price”.

Gold market in London is one of the oldest markets in the world and, until last Thursday 19th March, with the oldest system to set prices. This system consisted on two phone calls –the first one in the morning and the last one in the afternoon– every day (Monday to Friday) made by the members of the market (now, banks). In each phone call, banks submitted different bids in order to get a “consensus price”. This price was announced by the organizer of the market (London Bullion Market Association, LBMA) at the end of the auction and published by Thomson Reuters.

The banks which participated in the so-called “London Gold Fixing” were: Barclays, HSBC, Scotiabank and Société Générale. On the one hand, Deutsche Bank was the last bank to exit from this gold price system in December, 2013. However, on the other hand, three of the biggest Chinese banks –ICBC, Bank of China and China Construction Group– are already members of the market since January, 2014.

Gold nuggets

Up to now, the new electronic Clearing and Exchange method will be managed by ICE Benchmark Administration (IBA), a subsidiary of the listed company ICE. IBA also manages the London interbank market and the Libor (the interest rate reference when a bank lends money to other bank). According to some consulted experts, this benchmark will make the market be less manipulated than now.

To sum up, gold market follows the same way made by the rest of precious metals in the last months, pressed by regulators. The first market that changed the price system was the silver market in last August. This market is now carried on by CME (Chicago Mercantile Exchange) and Thomson Reuters. After this change, platinum and palladium market has been reformed too. The new manager is London Metal Exchange since last December, which manages other markets such as copper, iron ore or aluminium.

Disclosure: The author is not responsible for the views expressed in the article. The text has been written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.

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