The chief executive officer of Sharps Pixley Ltd., who has traded gold for 30 years, challenged a study that says the market’s price-setting mechanism is susceptible to manipulation, compromising the $19.6 trillion of the precious metal that trades annually.
The price fluctuations for gold when five banks meet daily to determine the so-called fixing in London are a consequence of supply and demand, not a sign of manipulation, said Ross Norman, the chief executive of Sharps Pixley, a broker of physical gold in the city. Norman previously worked at Johnson Matthey Plc, N.M. Rothschild & Sons Ltd. and Credit Suisse Group AG.
Five banks meet twice a day to set benchmark prices used by miners, jewelers and central banks to trade and value the metal. Unusual trading patterns in the spot market during the afternoon session suggest collusive behavior and should be investigated, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.
The bigger price swings in the afternoon are caused by both London and New York being open and more people trading bullion because of increased liquidity as the so-called fixing happens, said Norman. The volatility also reflects differing views on the value of metal rather than price manipulation, he said.
“The fix is a price-discovery mechanism where you’re trying to match buyers and sellers and as such price volatility is a natural and even desirable part of that process,” Norman said in a phone interview March 3. “It’s natural that you’re going to get these sharp movements. I don’t accept the assertion that the structure is inefficient and open to manipulation.”
The members of the fix are Deutsche Bank AG, Bank of Nova Scotia, Barclays Plc, HSBC Holdings Plc and Societe Generale SA, who also trade on behalf of clients. The calls take place at 10:30 a.m. and 3 p.m. and usually last about 10 minutes. The banks declare how many bars they want to buy or sell at the current market value. The price is adjusted until the buyers and sellers are within 50 bars, or about 620 kilograms, of each other. A kilogram of gold is valued at about $43,000.
Abrantes-Metz advises the European Union and the International Organization of Securities Commissions on financial benchmarks. Her 2008 paper “Libor Manipulation?” helped uncover the rigging of the London interbank offered rate. Metz heads credit policy research at Moody’s and wrote the paper independently of his position at the ratings company. Bloomberg News reported last week the draft paper, which hadn’t yet been submitted for publication.
The authors screened trading in the spot gold market from 2001 to 2013 and found that typically downward swings in prices started appearing more frequently in the afternoon fixings from 2004. Gold by then was in the fourth year of a bull market that ran through 2012, during which prices rose more than sevenfold.
The tendency for prices to drop in the afternoon fixing more likely reflects the balance of traders, Norman said. Sellers such as mining companies can often outweigh buyers, said the 54-year-old.
“Those that would want to sell would typically use the fix and of course buyers will know that,” Norman said. “Producers will typically sell through the fix because they have relationships with bankers on their hedging programs that require an objective price.”
There could be legitimate reasons to explain some spikes, but on average moves around the afternoon fixing seem “disproportionately large,” Abrantes-Metz said in an interview March 4. The size and frequency of the swings need to be evaluated within the context of how the fixing is structured, how opaque the trading is, the conflicts of interest, potential gains from abuse and a lack of appropriate governance and oversight of the benchmark, she said.
While trading during more active periods such as the afternoon fixing can explain larger price moves, the swings are often bigger than when floor trading starts on the Comex bourse in New York at 8:20 a.m. for instance, said Abrantes-Metz.
Since the fixing began taking place by conference call in 2004, rather than in a room in an office, it could be easier for banks to simultaneously trade in the market during the process, she said. Trading in gold derivatives expanded since 2004 and the potential gains from manipulating the fixing expanded as a consequence, she said.
“It’s clear to me that prices are predominantly going down,” said Abrantes-Metz. “If the argument is that someone is selling, my question is who is buying, and who benefits from prices going down to an extent that could be driving them further down? We should have a fix that’s based on actual trades that are visible to the market. We need to reduce the ability to manipulate it, independently of whether or not it has already been abused.”
Kevin Maher, a New York resident who says he bought and sold gold and gold futures and options, sued March 4 in Manhattan federal court claiming the banks overseeing the fixing colluded to manipulate it. He’s seeking to represent a class of all investors who, from 2004 to now, held or traded gold and gold derivatives that were priced based on the fix or who held or traded Comex gold futures or options. He’s seeking unspecified damages on behalf of the class.
A spokesman for Barclays and a spokeswoman for HSBC declined to comment on the lawsuit and Renee Calabro, a spokeswoman for Deutsche Bank, said “we believe this suit is without merit and will vigorously defend against it.” A spokesmen for Bank of Nova Scotia didn’t immediately respond to requests for comment.
“Societe Generale appears to have been named as a defendant in these proceedings together with other members of the London Gold Market Fixing Ltd.,” according to a statement e-mailed by the Paris-based bank. “The claims are unsubstantiated” and Societe Generale will defend against the proceedings, it said.
Officials at Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment last week on the report by Abrantes-Metz and Metz. Joe Konecny, a spokesman for Bank of Nova Scotia, didn’t respond to requests for comment at the time.
The gold fixing has faced scrutiny in recent months, with regulators in London, Bonn and Washington -- who are already looking into manipulation of interest rates and currencies -- investigating how prices are set in the market. About $19.6 trillion of gold circulated globally in 2012, according to CPM Group, a New York-based research company.
Officials from Bafin, Germany’s financial markets regulator, interviewed Deutsche Bank employees as part of a probe into potential manipulation of gold and silver prices, Bloomberg News reported in December.
The U.S. Commodity Futures Trading Commission discussed in private meetings last year reviewing how gold prices are set, Bloomberg News reported in November. The U.K. Financial Conduct Authority is also scrutinizing how prices are set.
The banks involved in the fixing will appoint external advisers to consider changes to the process, a person familiar with the matter said in January, asking not to be identified because the matter is private.
The fixing “is not perfect, but it’s still pretty good,” Norman said. “A little more transparency on the process as it occurred would be beneficial. It’s not good enough to be good, you’ve got to be seen to be good.”