BULLION DEALER INADVERTENTLY REVEALS HOW THE LONDON FIX CAN EASILY MANIPULATE GOLD MARKET

Ross Norman, CEO of the well-known London-based Sharps Pixley bullion retailer issued a rebuttal to the Bloomberg article and in defense of the London fix (LINK). Ironically, in his attempted defense of the gold fix process, Norman inadvertently exposes the system’s inherent flaws, thereby showing the reader how the London fix committee can easily manipulate the market.

By PM Fund Manager Dave Kranzler,

In a mainstream media disclosure that took the gold investment world by surprise, Bloomberg published a report - Article Link - last week which contained data from an academic study that showed that the daily London gold price fixing has been manipulated for at least 10 years. While this is not new information to many precious metals investors, it is the first time that an establishment news outlet has exposed the truth about the widespread and blatant Government-sponsored manipulation of the precious metals market. It should be noted that the Financial Times also published this report but then retracted and deleted the article.

The London daily gold fix is an event that has been setting the price of gold twice a day since 1919. With the advent of computerized market trading and the gold/silver futures market (1974), it would appear that the London fix is no longer necessary as a mechanism of “price discovery.” As we will see, the London fix still exists because it is used by the bullion banks as an overt market manipulation mechanism.

The price “fixing” is conducted by 5 individuals who work for their respective bullion banks. These individuals jointly decide what the “spot” price of gold should be twice a day, once in the morning and once in the afternoon (London time). They committee is allowed to communicate with market participants and their respective banks are permitted to continue trading gold and gold derivatives while these individuals decide what the price of gold should be. Theoretically this price as “fixed” is determined to be the price which will clear the market of all buy and sell orders up to that point. Theoretically, it provides a “benchmark” price for the spot price of gold. Incredibly, the time of fix occurs during the period of time when the Shangai Gold Exchange, the largest physical gold market in the world, is closed for the day.

But how can a closed system like this possibly operate objectively? The gold fix system is inherently ingrained with the conflict of interest and moral hazard the accompanies any system governed by collective “judgment.” The Bloomberg News article details a study done by NYU professors which showed that between 2004 and 2013 large price moves during the afternoon “fix” were moves lower at least 66% of the time. In 2010, the large moves were negative 92% of the time.

From their work, the authors concluded that the market in all probability was manipulated by the banks whose representatives establish the price fix every day: “There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards” – Rosa Abrantes-Metz, one of the authors of the study.

As it turns out, Ross Norman, CEO of the well-known London-based Sharps Pixley bullion retailer issued a rebuttal to the Bloomberg article and in defense of the London fix (LINK). Ironically, in his attempted defense of the gold fix process, Norman inadvertently exposes the system’s inherent flaws, thereby showing the reader how the London fix committee can easily manipulate the market. In fact nearly every point of assertion about, and defense of, the London fix process is embedded with half-truths or outright lies.

In response to the fact that there are unusually large moves during the “fix” period, Norman explains: “the fix is a price discovery process and as such large buying and selling orders collide here – large moves are therefore to be expected. In fact, the mere fact that it does move confirms some differences in opinion over fair value between the clients dealing in the fix – actually it supports the notion of the integrity of the process.”

This explanation is is patently disingenuous. Gold trades in either physical form or derivatives form (futures, forward) nearly continuously during the trading week. The “price discovery” process occurs inherently with every buy/sell transaction. To say that it is only at the time around the p.m. London fix that large orders to buy and sell constitute “price discovery” is entirely misleading. In a continuously functioning market, orders of all sizes are executed and “price discovery” occurs with each trade execution. A committee of five individuals is not needed and collective “judgment” about what the price should be is not required.

In his second point of defense of the London fix, Norman makes these comments: “the fix is used by official institutions (like Central Banks) and many major miners who all require an “objective” and published price because they need to [be] more accountable than say (sic) a proprietary trader. The spot price for example is neither of objective (sic) nor published. Selling by miners in size every day and invariably outweighs (sic) any official buying which is typically large but infrequent. Hedging or financing for the miners have will often (sic) link their financial arrangements to the gold fix.”

Just as a note, it’s interesting that Norman decided to put quotes around the word “objective.” Clearly the London fix is anything but “objective,” since by it’s very nature it defies the objectivity and price discovery mechanism of a continuously functioning market. I’m not sure why a “fixed” price needs to be “published” at all. At any given time during the 23 hour trading period of each business day gold trades in either physical or derivative form (futures, forwards). Anyone can go online and “discover” the current trading price of gold.

To be perfectly clear about this, any price which is determined in the market by a buyer and seller is inherently more objective and visible than is a price which is “fixed” by a committee of five individuals saddled with inherent conflict of interest. Mining companies and Central Banks are free to use the standard market mechanisms to execute their trades. To say that a committee operating out of view of the market can determine an official “spot” price is either unintentionally disingenuous or an outright lie. If anything, the London fix process prevents the true price discovery process of an open and free market.

Norman also claims the London fix conference call is not private and is open to clients. Do you have access to this call? Our firm does not. I don’t know of anyone who has access to this call. While the price fix committee of five may have information about the large buy and sell orders that are about to “collide” – to use Norman’s term – the market as a whole does not. An efficient market functions most efficiently in its price discovery process when as much information as possible about buyers, sellers and size is immediately disseminated to the entire market. The London price fix system not only prohibits the dissemination of information that might help the market achieve its price discovery goals, it leaves the discretion as to the “best” market clearing price at that point in time up to the committee of five who may or may not be on the phone with their best preferred LBMA member clients or their own banks.

Again, to reemphasize this point because it can not be emphasized enough, the price fix committee members have de facto conflict of interest by the very fact that the banks they work for have large capital positions in gold and silver. Furthermore, while detailed LBMA position data is not made available to the public, we know that these banks run large net short positions on the NY Comex. To say the least, the banks have a motivated interest to see a lower price fix every day.

Norman next tries to defend against the findings of the study that the price of gold at time of the p.m. fix is fixed lower a majority of the time – with the statistical evidence overwhelmingly in support of this conclusion – by explaining that if London gold dealers (i.e. the bullion banks) “had consistently shorted gold as maintained” they would have suffered massive losses.

This assertion is absurd because it assumes that the big bullion banks are always long gold. Yet, we know from over a decade of Comex data that the big bullion banks have run massive short positions in Comex gold futures. We don’t know whether the big banks are net long or net short on the LBMA because the LBMA does not publish enough information about the big bank forward contract and bullion positions. In fact, from the size of the historical net short position of the big banks on the Comex, and the accompanying trading turnover of these positions, any bank with access to information about the level of the price fix before the general market sees it has the ability to net rapid and riskless trading gains on a daily basis.

Finally, Norman tries to deflect the issue entirely by opining on the “vested interest” of Bloomberg in publishing this article and ends by scolding the organization (“shame on you…for lack of journalistic discretion and judgment…and failure to ask the right questions”).

As Norman tolls this bell of scorn and disdain for Bloomberg News, ironically he’s ringing it at himself, as Norman’s disingenuous defense of the LBMA gold price fix surreptitiously exposes the reasons why the gold fix process is highly flawed. Indeed, it is a system of price determination which is susceptible to the moral hazard and market misconduct which accompany any market system in which price level is determined by a small committee individuals, all of whom have a high level of inherent conflict of interest.

One last point, Norman is correct that Bloomberg fails to ask the right questions. Here’s a small sampling of the right questions: 1) Given that the gold market trades nearly continuously during the business week, either by auction or computer, why is the London fix needed at all? 2) Why does the fix occur after the Shanghai Gold Exchange, the worlds largest physical bullion market, has closed for the day? 3) Why are the members of the price fix committee allowed to be representatives of the big bullion banks? 4) if #2 is unavoidable, shouldn’t the members be from organizations which do not run capital positions in gold and silver or stand to benefit from inside knowledge about the price fix? 5) Why doesn’t the LBMA publish more specific and detailed data about the forward contract and bullion positions of its member banks?