Fixing the Gold Fix—With or Without the Chinese Banks?


"The new price setting mechanism will be launched on the March 20—this coming Friday."

Gold in safe

The end of this week will see the end of an era in London-based gold price benchmarking when the rather archaic London Gold Fixing system, which has been in place little changed for most of the past 100 years (since 1919), will come to an end and be replaced by the new LBMA Gold Price electronic system that is being set up in its place. The new price setting mechanism will be launched on the March 20—this coming Friday.

I would commend readers to check out two detailed analyses of the implications of the new gold pricing systems, which in part do disagree with each other on the possible role of Chinese banks within the new process and whether this may end up sidelining the bullion banks in gold price benchmarking. The first of these analyses is from Alasdair Macleod of Gold Money—who does indeed suggest that the new era will bring an end to the control of the gold price benchmarking process by the bullion banks, with the Chinese banks ultimately exerting overall pricing control—See: The New London Gold Fix and China's Gold Strategy.

The second is a very long analysis by Ronan Manly on Bullionstar which doesn't quite reach the same conclusions and suggests instead that the LBMA and the bullion banks may remain firmly in control of the new pricing mechanism.—See: Chinese Banks as direct participants in the new LBMA Gold and Silver Price auctions? Not so fast!

Much of the difference in thinking revolves around the actual selection by the London Bullion Market Association (LBMA) of the initial direct participants in the new electronic price setting process being administered by ICE Benchmark Administration. While Macleod posits that it is inevitable that one or more of the three major Chinese banks which have expressed interest in participation in the new process, and would appear to meet the qualifications for so doing, will be involved as direct participants from the start, Manly is not so sure, pointing to his interpretation of the language used in many of the statements on the make-up of the direct participants which could be taken to suggest that the Chinese banks will not be selected from the start. He also drew, as an example, on the processes followed for the selections of participants for the new London silver pricing system, also organized through the LBMA.

Manly notes that the following banks are likely to be in the mix as direct participants in the new gold pricing process. Firstly the four bullion banks currently involved in the London Gold Fixing system: Barclays, HSBC, Scotia Mocatta, and Société Générale. Then he adds JP Morgan, UBS, Credit Suisse, Goldman Sachs, Mitsui Bank, CitiCorp, Morgan Stanley and Standard Chartered. However, neither the Direct participant list, nor the chairperson of the process, will be announced until the day the new process takes over.

Manly goes on to note that when the day comes a few of the above noted bullion banks may prove not to be on the list. Likewise, other bullion banks such as Commerzbank, Natixis, ANZ, Standard Bank or BNP Paribas could yet be on the list. "Until LBMA and ICE actually publish the list, the only alternative is to speculate," he says.

Now there are no Chinese banks on Manly's listing of Day 1 likely direct participants – but plenty of bullion banks! To an outside observer it would seem inconceivable that none of the three Chinese banks which are seen to meet the qualifications for inclusion – Bank of China, Industrial and Commercial Bank of China (ICBC) and China Construction Bank – will be included from the start, but the bullion banking sector and the LBMA may well be arrogant enough in their approach to exclude them and ride out any resultant storm, which would likely soon blow over.

Macleod, in his analysis reckoned that if the state-controlled Chinese banks are included, China would then have the opportunity to take a dominant role in London, without having to direct its order flows through the fixing banks. "Therefore, it is no exaggeration to say that from March 20, China will be able to control the global physical gold market, which will permit her to manage the price. She has the deepest pockets, backed by the largest single stockpile."

He goes on to say that the failure of the London bullion market to see strategically beyond its short-term interests has opened the door to China's powerful state-owned banking monopoly to thus control the gold bullion market. He sees this as probably the final link in China's long-standing gold strategy, and through it a planned domination of the global economy in partnership with Russia and the other Shanghai Co-operation Organisation (SCO) nations.

However, should the LBMA be more aware of the dangers of unleashing control of the gold market than Macleod suspects, then maybe its vested interests will seek to postpone the day by finding excuses not to accord the Chinese banks direct participation status—although this in itself might be a dangerous game. We will have to wait until Friday to see how this one plays out—at least initially.

Lawrence Williams

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