* Deutsche Bank's seat at gold fixing table a 'tough sale'
* Prospect of increased scrutiny offsets kudos of role
* Candidate may emerge among Asian banks -sources
By Jan Harvey and Clara Denina
LONDON, Jan 22 Deutsche Bank's decision to put
its seat at the gold fixing table up for sale has raised
questions about the future of the price benchmark.
One stands out: who, after the Libor scandal, will want it?
Gold price setting or 'fixing', determining the benchmark
for the billions of dollars traded every day, is nearly a
century old. The modern twice-daily system launched in 1968.
Unlike most commodities which are dominated by futures
trading, gold is chiefly a cash market.
Involvement in the fix offers little financial benefit to
members, but a seat at the table is prestigious. However, that
may not be enough.
"It's a tough sale at the moment," one source in the London
precious metals market said. "There's nothing really in it for
the banks, except the opportunity to say that they're a fixing
member, which carries a certain kudos."
Increased scrutiny, with regulators pushing for new rules on
commodity benchmarks after the Libor scandal, threatens to
outweigh that benefit, the source said.
Regulators including German's Bafin, Britain's Financial
Conduct Authority and the U.S. Commodity Futures Trading
Commission have all increased scrutiny of commodity indices
after the London Interbank Offered Rate, Libor, was rigged by
The International Organisation of Securities Commissions
(IOSCO) issued guidance in July covering all benchmarks that are
central cogs in the global economy, from interest rates to
equities and gold.
A handful of banks getting together to decide the benchmark
gold price twice each business day is seen by detractors as
anachronistic and opaque.
"It is a very old-style, archaic system and it is amazing
that such a way of doing business has survived the modern day
and age, where everything is so fast and electronic," Saxo Bank
senior manager Ole Hansen said.
Gold market participants say concerns about opacity reflect
a fundamental misunderstanding of how fixing works.
"The fix, unlike LIBOR, is a key pricing mechanism that
involves the whole of the interested parts of the market at any
one time, from jewellers up to central banks participating in
pricing through the fix," Rhona O'Connell, head of research at
Thomson Reuters GFMS, said. "Any market participant can change
his order at any time, and the market is fully transparent."
"It's not as if it's a majority vote on the price, after
all, it's the whole of the interested market that's involved."
Apart from Deutsche, four other banks take part in the
fixing - Barclays, HSBC, Societe Generale and ScotiaMocatta.
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, 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 "fixed".
Increased regulatory scrutiny looks like the stumbling block
in finding a new buyer for Deutsche's seat.
"There could be quite a few contenders but it also depends
on what effect all the regulatory focus has," one gold market
source said. "If regulators are going to say 'well the fix
doesn't work as it is, and we have to find another way of doing
it', nobody is going to want to buy that seat."
It is Deutsche's responsibility to find a buyer for the
seat, who would have to meet with the approval of the other
members. The price would be negotiated between the buyer and the
seller. The last time a seat was sold in 2004, it cost around
one million pounds, sources said.
A logical possibility would be for another of the London
Bullion Market Association's market-making members, who quote
two-way prices to each other during the London business day for
agreed minimum quantities, to take a place at the table.
The market makers not currently involved in fixing - Credit
Suisse, Goldman Sachs, JPMorgan, Merrill Lynch, Mitsui Precious
Metals and UBS - all declined to comment on whether they would
A candidate is more likely to emerge among the Asian banks,
sources say, as these look to raise their profile in the London
market at a time when Asia is taking a more important role in
the gold industry as physical metal moves eastward.
Chinese banks have increased their profile in the London
gold market. Bank of China (BoC) and Industrial and Commercial
Bank of China (ICBC) are both already members of the LBMA. ICBC
is also about to complete the acquisition of the London
commodity arm of Standard Bank, another member of the London
Bullion Market Association.
Both banks declined to comment on whether they were
interested in joining the fixing group.
If no buyer is found, it could potentially continue with
just four members, but that is unlikely to happen. Gold traders
say the benchmark still has value, helping them to hedge risk,
which would be more difficult if they were negotiating sales
privately with each client.
"There isn't really another way you can get a fair snapshot
of the market twice a day," one gold trader said. "If the fixers
step away, it leaves it open to questionable prices being put
through, with no reference to where the actual gold price is."