Gold, Exchange Rates and the London Fixing
By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch

This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

The Gold Price and non-U.S. $ Gold prices

While the rise in the $ price of gold has been sound, without being spectacular [the rise of late has only been around 10% over the average of the last 18 months], it has barely moved in many currencies.

With South Africa, as one of the leading gold producer’s currencies, the Rand, the gold price has hardly moved, while gold investors there have steadily built up their holdings. In that period the Rand has strengthened from a low point of around R10: U.S. $1 [October 2008], to R7.4: $1, sucking out all the benefits of a $ rise in the gold price.

In Indiaa major gold buyer, the Rupee has risen from around Rs.48 to the present Rs.46.55: U.S. $1 a rise of 3.0% in the last month. This has left some gain in the gold price but not sufficient a gain to deter buyers who have accepted the gold price will stay over Rs.15,000 for 10 grams of gold. The high price itself is cutting the size of purchases, but this is a trend that has occurred all the way up the rise in the gold price. Indian buyers do not have the same mindset as western buyers. They are not focused on the state of the world’s money systems, only on the Rupee price of gold and their own financial security. To them gold is better than the Rupee.

The $ has fallen against the € by 6.78% in the time it has taken the gold price to rise from $985 to $1,056 a rise of 7.2%. And yet a very large amount of gold has been bought through London [at the Fixes] for investors from the East side of the Atlantic right through to China. To understand the gold market fully, investors should be familiar with the London Gold Fixing.

This is where the important price of gold is made to reflect gold demand and supply accurately, twice business day, daily. Investors buy from retailers, who buy from wholesalers, who buy from the Bullion Banks who buy through the London Golf Fixing.

This is where Central Banks also buy and sell, when not buying from their own local producers [they do deal in the futures markets too]. It is where Sovereign wealth funds and other major institutions acquire physical gold too.

The London Gold Fixing

Outside COMEX the demand for gold is nowhere near as robust as across the Atlantic. We believe that 90% of the gold traded worldwide is dealt through London and it is for physical delivery, once netted out. In the last couple of weeks we have seen long fixing sessions, an indication of huge volumes. Take the 19th October, four of the members were buyers and one a seller.

There are two Fixing sessions, one in the morning at 10.30 hrs GMT and then, to ensure inclusion of U.S. participants, one at 1500 hrs GMT. In these, the five members sit linked to each other through a dedicated conference call line, while also connected to their clients, who are kept informed of the price as it is moved in line with the buying bids and selling offers.

At the start of each fixing, the Chairman announces an opening price to the other 4 members who relay this price to their customers, and based on orders received from them, instruct their representatives to declare themselves as buyers or sellers at that price. Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade.

If at the opening price there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The Chairman then announces that the price is fixed. It should be noted that the Fix is said to balance, if the buy amount and the sell amount are within 50 bars [2000 ounces, 400 ounces each] of each other. The Fixing will last as long as it is necessary to establish a price that satisfies both buyers and sellers.

Customers may leave orders in advance of the Fixings. Alternatively, they may choose to be kept advised of price changes throughout the Fixing and may alter their orders accordingly at any time until the price is fixed. To ensure that the price is not fixed before the member has had an opportunity to communicate any changes each member has a verbal flag. As long as any flag is raised, the Chairman may not declare the price fixed.

Members

The Members are: The Bank of Nova Scotia- Scotia Mocatta, HSBC, Deutche Bank AG, London, Societe Generale Corporate & Investment Banking and Barclays Capital. As you can see these are prime gold names globally.

So when the SPDR gold Exchange Traded Fund buys gold for its shareholders, it buys through HSBC who holds it in its vaults for the shareholders. In this way gold has a global but centralized market. The price quoted at the fix is a clear measure of overall global supply and demand.

When will the Gold Price rise in All Currencies?

Indeed, for the gold price to really show its mettle, it does have to rise in all currencies. But when that happens, it will signify a horrifying state of affairs in the monetary arena.

Well before then, the market will, as it is doing now, discount that future time. In centers where the gold price is not rising in the local currency, investors are fully aware that if the $ falls into decay, it will not be too long until even the strong currencies will follow.

The only time when this will not happen is if another economic bloc can drive the global economy to the extent the U.S. economy is now. That may well be a decade away and when Chinese is taught as a second language in most countries. The time ahead will continue to be one of uncertainty and fear. This will continue to drive investors in strong currency countries into gold, hopefully, while that currency remains strong.

Beware the tendency to want to be able to measure, accurately, gold’s price against another item, such as the $. Uncertainty and fear are often immeasurable emotions. Perspicacious investors look ahead and buy accordingly. That’s where we are now. The $’s fall is symptomatic of a decay in the entire monetary system, not just the $. The tensions that the fall of the $ will produce will impact on other nation’s Balance of Payments and on a wide range of industries. We’ve seen it already. But this will not be all.

These problems will spread to the political front and where international cooperation is needed, national interests will clash in the monetary system. History tells us that a shift of power, military or economic, always leads to the heaviest of confrontations. Sadly, the monetary system could well be the battleground.

Gold will discount that future before it happens, as always. The price will not be the accurate measure of that but the acquisition of gold and by whom will be. At the moment the build up of gold reserves by China and Russia is the most significant of gold market actions we have seen for many years.

The Implications for the Gold Price

For Subscribers only! We will be sending out a review of the gold market to Subscribers only, that reveals why the gold price is being held well above $1,000.