Gold in a spot

Concerns flagged by New York University researchers that the venerable global benchmark for physical gold trades — the London Gold Fixing — could have been manipulated for a decade, cannot be dismissed as mere scare-mongering. After all, similar allegations about rigging of the London Inter-Bank Offering Rate (LIBOR) proved all too accurate, with investigations revealing collusion and price rigging of monumental proportions by participating banks. Whether manipulated or not, the manner in which the London Gold Fixing is arrived at is an anachronism in this era of online trading and electronic order matching.

The five global banks which have a seat on the fixing committee hold a tele-conference twice a day at London, to discuss ‘buy’ and ‘sell’ orders from their clients based on an opening price. The final ‘fixing’ is declared at the price at which the buy and sell orders are closely matched. This method of price-setting is open to criticism on many counts. One, the fixing banks have an undue advantage over other gold market players and a possible collusive advantage. Two, the entire process is opaque as bids and offers are discussed over a closed telephone call, and not through an open order book. When the London fixing emerged as a global benchmark in the 1900s, gold was traded mainly in physical form, with central banks, miners and institutions from the Western world dominating the market. But gold is now a financial asset and it is retail buyers from India and China apart from investors in exchange traded funds, who drive this market. This structural change calls for a benchmark that is amenable to real-time price discovery on a transparent electronic platform. In this context, India and China, the largest consuming centres, have the potential to emerge as global gold trading hubs.

The London Gold Fixing may survive this controversy, but it has exposed the failings of markets where cosy clubs of traders decide on asset prices via the telephone. It is time such over-the-counter markets are replaced by regulated, democratic electronic exchanges. Indian regulators have some soul-searching to do in this respect as well; both the foreign exchange and corporate bond markets are dominated by telephone trades. But more importantly, this controversy should be a wake-up call to the Indian jewellery trade, which still prices its goods based on ad-hoc daily ‘spot’ rates decided by industry bodies. These prices are currently at an unjustifiable premium over landed costs. With ₹2.50 lakh crore worth of jewellery bought each year, it is time India evolved a standard benchmark price for physical gold so that consumers get a fairer deal.

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