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Change is coming to How Gold Prices Are Set in the Market

As technology takes over the markets, the manner with which gold prices have traditionally been set is bound to change forever. The new method of fixing gold prices could significantly change how gold is traded.

 

Change is coming to How Gold Prices Are Set in the Market


March 19 was the last day that market traders at four major banks used phones to agree on the price of gold and convey this to central banks across the world, who then value bullions. Gold is ultimately the final precious metal to cease using the London system of price fixing—since last year, silver, palladium and platinum prices are set through an auction.

The utilization of technology in setting gold prices will allow more firms to participate in determining the benchmark price. This will in turn make the gold market, worth $18 trillion, more transparent.

The ICE Benchmark Administration will begin implementing the London Bullion Market Association (LBMA) Gold Price starting March 20. Traders or anyone interested in the gold market can now keep up with the auctions online instead of needing to call a fixing dealer.

According to Ross Norman, the chief executive at Sharps Pixely Ltd., “What is really important is for information to be easily accessible to a wider audience.

He further added, “If they can create greater depth in the market, this change will be welcomed.

The first time gold prices were set was in 1919 in St. Swithin’s Lane. Back then, traders would hold meetings in a room and dealers in the room held the U.K. flag to indicate when the orders needed to be changed. In 2004, the process later changed to the use of telephone conference calls.

The dealers would record price predictions on paper and store these documents in a clock case. Fixing was typically done on January 31, on New Year’s Eve.

 

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Trends in the Gold Market

In 2013 alone, an estimated $18 trillion worth of gold was traded in the market, according to reports by CPM Group, a research group in New York. On March 19, the price of gold was set at $1,164.

The initiative to introduce the use of technology began with Deutsche Bank AG. Last year, the bank stopped using its benchmarks for precious metals and as a result, other dealers including Barclays Plc, HSBC Holdings Plc Bank of Nova Scotia and Societe Generale SA were left to fix the prices of gold.

Last month, the London Bullion Market Association indicated that Chinese banks were gearing up to participate in the new benchmark. At least six firms will be able to take part in setting the prices, but none of the Chinese participants has confirmed yet.

IBA President, Finbarr Hutcheson said that there is a possibility that more companies, including Chinese ones, could participate in the future.

The new auction process will begin March 20 between 10.30am and 3pm London time. Traders will submit buy and sell orders electronically until a price is agreed upon

According to the Intercontinental Exchange Corporation, a chairperson will be in charge of determining prices in each round based upon an algorithm that has been agreed upon.

James Moore, an analyst at FastMarkets Ltd in England said, “That interpersonal touch of the market will be lost to technology.  Calls offered the opportunity to create relationship that often led to other opportunities.”

Market Impact

Market observers say the new method of fixing gold prices could significantly change how gold is traded.  The new method will be more transparent about each day’s collective gold prices across the world markets.

The new fixing method will open up gold trading market to a new set of participants. If Chinese banks opt to participate in fixing gold prices, there could be an arbitrage of the prices difference in London and Shanghai to ensure the market is international and open 24-hours.

 

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