[miningmx.com] – MARCH 20 marks the end of an era when the London Gold Fixing system, which has been around for almost a decade, will be replaced by an electronic pricing mechanism.
Direct participants will be involved in the new electronic price setting process, which will from now on be known as the London Bullion Market Association (LBMA). The Intercontinental Exchange (ICE) Benchmark Administration will administer the platform.
The question begs if this new pricing platform will indeed be a game-changer as some analysts predict. Will it lead to more transparency and stability in the gold price?
The incumbent Gold Fix has been in operation since 1919 and the gold price was set through a arrangement by the four bullion banks of the London Gold Market Fixing – Scotia Mocatta, Barclays, HSBC and Societe Generale.
In the new arrangement more banks will participate in the pricing process, such as JP Morgan, Credit Suisse, Goldman Sachs and Morgan Stanley, to name but a few.
Whether the big Chinese banks – the Bank of China, Industrial and Commercial Bank of China and China Construction Bank – may be included remains to be seen.
Chris Hart, economist at Investment Solutions, believes the new pricing system will lead to more transparency in the industry.
“A small number of people were actually setting the gold price with insider knowledge and there have been increasing concerns about market manipulation,’ he said. “So this is one of the reforms that needed to take place.’
It may not be the end of the “skulduggery’ from central banks, as countries like China and Russia have more gold than they disclose. It is believed that China currently has the largest stockpile.
Moreover, China has had a long-standing gold strategy in partnership with Russia.
“I believe that London’s dominance of the gold price setting will be replaced by Asia. Shanghai and Mumbai will play an increasing role. The physical gold is actually in the East and India’s gold are in private hands,’ Hart said.
Andrew Lane, Director at Deloitte who heads up the Energy and Resources Practice, said the electronic LBMA price-discovery process will lead to a more market-effective determination of the gold price. “It should be a closer representation of supply and demand in the gold sector and more dynamic.’
As for gold producers, the verdict is still out if the new pricing mechanism will have a substantial effect on the gold price as such.
Said James Wellsted, spokesperson for Sibanye Gold: “Obviously as suppliers we have very little influence over the gold price and it’s been very volatile in recent years.
“We noted the allegations of price-fixing and certainly the method that was used in the past (in which the four big banks get together on an afternoon in London and decide what the price should be doesn’t really conform with the best standards of governance or transparency. That’s why they are moving away from it to try and get away from those allegations and bring more transparency to the process.’
Sibanye, however, was sceptical that it would lead to more stability in the gold market. In fact, the opposite may happen. “Because the banks were fixing the price you’d assume that it would have been less volatile than when on an open market,’ Wellsted said. “So I would say volatility could potentially be higher.’
Graham Briggs, CEO of Harmony Gold also doesn’t foresee that the LBMA Gold Price mechanism will have an impact on the gold price. “At best it will lead to better governance,’ he said.
Arkadiusz Sieroń, an investment adviser that specialises in previous metals, believes more participants in the new pricing mechanism – especially the if the Chinese banks are involved - could have a more direct influence on the international price of gold.
In a Kitco commentary on precious metals, Sieron wrote that the Chinese are considered to be “more bullish’ on gold and that it’s “an open secret that gold prices trade at higher levels during Asian trading hours’.
Said Wellsted: “I doubt it will change anything in terms of the gold price. The Chinese banks could have been buyers in the market anyway. I don’t see how that’s going to change pricing.’
“We as producers are price-takers, quite honestly. And the price seems to be more driven by the dollar at the moment than by anything else.’
