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Sunday, April 08, 2007

London Gold Prices

London gold prices are fixed twice a day at 1030am and 3pm London time. The London Gold Fixing is done by five members of the London Bullion Market Association. They sit down and discuss the price until they come to an agreement. This has, in the past, taken some time but these days it usually only takes a few minutes.

According to Wikipedia, the first fixing actually took place on 12 September 1919 among the five principal gold bullion traders and refiners of the day: N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price then was a princely four pounds 18 shillings and ninepence (GBP 4.9375) per troy ounce. Due to wartime emergencies and government controls, the London Gold Fixing was suspended between 1939 and 1954.

The gold fixing was then done twice daily at the City offices of N M Rothschild & Sons in St Swithin's Lane until May 2004 when it was taken place by the telephone. In 2004 N M Rothschild & Sons withdraw from gold trading and the London Gold Fixing and was replaced by the Barclays Bank.

A curious tradition of the London Gold Fixing was that participants would raise a small Union Jack on their desk to pause the proceedings. Under the telephone fixing system this changed and participants can now register a pause by saying the word "flag", and the chair ends the meeting with the phrase "There are no flags, and we're fixed".

The current five participants in the Fixing, who must be members of the London Bullion Market Association, are now all banks unsurprisingly. They are:

Scotia-Mocatta — successor to Mocatta & Goldsmid and part of Bank of Nova Scotia
Barclays Capital — Replaced N M Rothschild & Sons when they abdicated
Deutsche Bank — Owner of Sharps Pixley, itself the merger of Sharps Wilkins with Pixley & Abell
HSBC — Owner of Samuel Montagu & Co.
Société Générale — Replaced Johnson Matthey and CSFB as fifth seat

Now even though you will see a gold fix price in dollars it is actually done in British Pounds Sterling and Euros not dollars. The gold fix in euros is a new venture. Traditionally, the London gold fix has always been in Pounds Stirling.

Although the London gold fixing is done twice a day and a gold price established, this does not mean that the price of gold stays at that price until the next gold fix. This is not the case. The fix price is the price at the exact instant in time at which it is agreed but within seconds it will be trading at different prices again.

So why have a London gold fix at all? Basically the five members use this as benchmark to establish a market price fixed for that precise moment when they can balance their sales and purchase transactions including orders and commissions from their clients. It also serves as a guideline for other gold dealers internationally.

Because five banks now 'control' the London Gold Fixing, it could be said that the banks are controlling the price of gold. This would be incorrect. The London Gold Fixing has become more of an institution and tradition than anything else. The price of gold is controlled by peoples perceptions of the value of gold, world economic affairs, how much gold is being bought and sold and other external influences such as new discoveries, sudden large purchases etc.

The London Gold Fix or London gold quote, as it is sometimes called, simply acts as a guideline which, in fact, many around the world do not follow. If a new gold strike is discovered in the outback of Australia, or China decides to buying several million extra tones, that is likely to have a greater impact on the price of gold than any agreement 5 men in an office is going to make.

Historically it has not controlled the value of gold, which seems to retain its own value regardless of the many variables that can appear to affect it. There are daily rises and falls and even weekly or monthly rises and falls which many analysis enjoy discussing and making up charts for. But in the final analysis, gold has been rising steadily over the past 100 years against just about any currency you care to name and is likely to continue that trend.

People love gold. People love to own and keep gold. Gold is considered valuable. People will always consider owning gold a better option than paper currency. Paper currency is a tool these days used by governments and those that influence them to control economies. This cannot be done with gold, hence the dropping of the gold standard. A currency will change and can be the subject of manipulation, inflation and depression (sorry – recession).

Gold stands alone. Offer gold to someone and they will take it. You can buy exactly the same value with an ounce of gold now than you could 50 years ago. Not something that could be said about currency.

Regardless of the London Gold prices and the fixing of the gold price each day, gold will continue to be a favorite and considered valuable regardless of the times and economics of the day.

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