How London's gold and silver price benchmarks are "fixed"

Fri Jan 17, 2014 12:24pm EST

* Five 'fixing' banks for gold reduced to four

* Market benchmarks being reviewed in wake of Libor affair

By Jan Harvey and Veronica Brown

LONDON, Jan 17 (Reuters) - European regulators including Germany's Bafin are looking more closely at how banks set benchmarks such as the twice-daily spot gold price fix after the Libor rigging scandal exposed widespread interest rate manipulation.

Deutsche Bank said on Friday it was pulling out of the group of banks that set the benchmarks for gold and silver prices after London's century-old price-setting process, known as 'fixing', came under increased scrutiny last year.

Allegations that currencies and precious metals are being manipulated are particularly serious, Bafin President Elke Koenig said on Thursday, because such reference values are typically based on real transactions in liquid markets, and not on estimates of the banks such as for LIBOR and Euribor.

"It's understandable that this topic is making big waves," she said in a speech. "Markets depend on the trust of the wider public that they are performing and that they work honestly."

Bafin declined to comment on Deutsche Bank's decision to leave the gold fix. The Financial Times reported in December, citing sources, that the regulator demanded documents from Deutsche Bank as part of a probe into suspected manipulation by banks of benchmark gold and silver prices.

A source close to Britain's Financial Conduct Authority (FCA) said the regulator was doing a lot of work on all benchmarks, including commodity benchmarks and gold. "So there is a renewed regulatory focus on that," the source said.

The U.S. Commodity Futures Trading Commission (CFTC) said last March it had started internal discussions on whether the daily setting of gold and silver benchmarks is open to manipulation.

WHAT IS THE FIX?

The fixing of the gold price in London dates back to 1919, originally involving NM Rothschild & Sons, Mocatta & Goldsmid, Samuel Montagu & Co, Pixley & Abell and Sharps & Wilkins. Silver price-setting started in 1897.

Gold fixing happens twice a day in a teleconference between banks, which numbered five prior to Deutsche Bank's withdrawal and also included Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, HSBC Bank USA and Societe Generale. The fixings are used to help determine prices globally.

Chairmanship of the Gold Fixing rotates annually among the member banks.

At the start of each fixing, the chairman announces an opening price to the other four members, who relay that to their customers and, based on orders received from them, then instruct their representatives to declare themselves as buyers or sellers at that price.

The gold price is adjusted up and down until demand and supply is matched, at which point the price is declared "Fixed".

The fixings are used to determine spot prices for the billions of dollars of the two precious metals traded each day.

Buyers and sellers can get insight on price changes and the level of interest during the fixing process. They can cancel, increase or decrease their interest based on that information.

Gold and silver price setting has long been the subject of debate, and the CFTC looked at complaints about the silver market in 2008.

But most say that the process is transparent.

"The fix is one of the most open market pricing mechanisms in existence," Rhona O'Connell, head of metals research at Thomson Reuters GFMS, said. "It is not a LIBOR clone."

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