Gold: Changes in price-fix methodology at London bullion market to bring transparency

Published: March 24, 2015 12:08:20 AM

London is the centre of the world’s physical bullion trading. The London Bullion Market Association (LBMA) sets and maintains...

London is the centre of the world’s physical bullion trading. The London Bullion Market Association (LBMA) sets and maintains the highest standards in refining, documenting and storing every gold and silver bar allowed to circulate at spot prices in the market.

To allow for greater transparency and easier tracking of submissions and bring depth to the price discovery of the gold, the historic London Gold Fix has been discontinued and replaced by the LBMA Gold Price from March 20. The traditional process via a secure conference call has been changed to a new electronic LBMA price-discovery process. The price will continue to be set twice daily (at 10:30 and 15:00 London GMT).
Under the old process, each bank would confer by phone with clients — other financial institutions and gold producers and consumers — and, then, declare if it was a buyer, seller or had no interest. If there were only sellers, the price was lowered, and vice-versa.

This was repeated until the difference between buying and selling requests was less than 50 bars and the price was fixed. However, under the new process, anonymous bids and offers will be published onscreen in real time with the imbalance calculated and the price updated until the buy and sell orders are matched. If the imbalance between buy and sell orders is within 20,000 troy ounces, the price will be fixed. Each round lasts 45 seconds.

The new LBMA Gold Price will be operated and administered by an independent third-party provider, ICE Benchmark Administration (IBA), which was chosen following consultation with market participants. IBA will provide the price platform, methodology as well as the overall administration and governance for the LBMA Gold Price. The process will provide significant enhancements to the process of setting the LBMA Gold Price.

Second, it may may lift the secretive veil. The new process opens up the playing field for gold trading. More participants will be involved in setting the benchmark price of gold. Six entities will provide the data used to establish the daily gold price. More participants should provide larger transparency.

Third, the new gold price mechanism may be positive for the gold prices. A few Chinese banks  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 have been large buyers of gold in the last few years.

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 government should encourage enough Indian banks to participate given that the country is the largest consumer and importer of gold. In India, Sebi had earlier notified that the gold held by a gold exchange-traded fund scheme shall be valued at the AM fixing price of LBMA in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand, which will now be LBMA Gold Price.  In short, the new gold price mechanism should bring in more transparency to the market.

By Chirag Mehta

The writer is fund manager, Commodities, Quantum AMC

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