London, April 27: A light will be shone on the secretive world of setting gold prices in a review launched by the UK Financial Conduct Authority (FCA), which is studying whether gold market benchmarks are operating properly in the wake of the Libor scandal.
The regulator has started to gather information from market participants about the London gold fix, the benchmark price used worldwide to price the precious metal. The FCA is visiting all five banks that hold seats helping to “fix” the price of gold twice a day, once in the morning and again in the afternoon. It may analyse documents and policies, interview traders and examine IT systems.
The banks, none of which are suspected of wrongdoing, talk on conference calls each morning and afternoon to agree their best guess of what the gold price should be, then release the estimate as a benchmark price, a process that has existed since its establishment by NM Rothschild in 1919.
Rothschild is no longer a member of the panel. For the present members — Deutsche Bank, HSBC, Scotiabank, Barclays and Societe Generale — having a seat could become a headache rather than a coveted line into the precious metals markets. Deutsche is trying to sell its seat but could be hampered by lawsuits filed in America alleging that the market is being manipulated, claims that are denied by both Deutsche and Societe Generale.
The FCA does not regulate gold markets directly but is responsible for all financial products based on gold prices. It has not launched an investigation into the manipulation of the gold price and is gathering intelligence about how the market operates.
International regulators have drawn up new guidelines on how benchmarks should work in the wake of the Libor scandal. The FCA was a big contributor to a report drawn up by the International Organisation of Securities Commissions last year on the principles that should guide the setting of benchmarks to promote transparency and resolve the conflicts of interest.
So far, no regulator has drawn any firm conclusions about gold markets. However, concerns have been raised that they are open to manipulation by Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business and a managing director at Moody’s, the credit ratings agency.