Outside of a Communist utopia, price is not an abstraction. Nor is the London Gold Fix...
YET MORE FUSS today over the London Fix, the snapshot which the world uses as its benchmark for gold and silver prices on a daily basis, writes Adrian Ash atBullionVault.
It's not a complicated process, as the member banks of the London Fixing Ltdexplain here. As the spot price of gold or silver is constantly moving up and down, a small number of bullion-trading banks offers to take orders for a set time of day, known as the Fix, from their clients. The aim is to find the single price which maximises the volume of trade at that point, by meeting as much supply and demand as possible.
With the participant banks referring to their client orderbook, getting near and then reaching this single clearing price can take a few seconds or several hours (as it did on Black Monday in 1987). Also note that, thanks to modern conference-call technology, the banks' clients can now listen in and change their orders as the Fix is in progress. And all the while, both they and the participant banks can also continue to trade on the spot, futures or ETF markets whilst the Fixing is in conference, too.
Now, Bloomberg have picked up an academic paper from September. It finds that trading activity in gold futures and exchange-traded funds (ETFs) seems to "know" the Fix price in advance, before it is announced, signalling whereabouts it will finish.
Oh horror! This must be a very bad thing. Because the markets should of course react to the London Fix after it is announced, not predict where it will be. Or so the world now thinks when it sees the word "benchmark".
But this gets everything the wrong way round. Because the Fix (which has happened pretty much every day since at least 1907, with a formal statement of the price announced daily since 1919) is achieved by genuine buying and selling. It is reached as a result of trading activity (ie, it is a price), including that very same trading activity which the academics took so much trouble to analyze across the related derivatives markets.
So the apparent "leaks" are in fact flowing the other way. It is the buying and selling in spot physical, futures and ETFs which determines where the Fix is set. Not the other way round.
Still, no matter. The Fix is now set for close inspection. No doubt big changes will follow as the bull market in regulation rolls on after the global financial crisis, trying to stop what already happened from happening again. This is sad. Because outside of a Communist utopia, price is not an abstract perfection. It is the result of hundreds, thousands or millions of purchase and sale decisions. And each participant has a vested interest. Buyers want lower prices. Sellers want more. Where they meet, that's where the price is.
Which is what happens at the London Fixes.
Knowing that, please read the abstract from the research paper in question.
"We find significantly elevated levels of trade volume and price volatility immediately following the fixing's start, well before the conclusion of the fixing and the publication of its results. Similarly, we find statistically significant return advantages in the 4 minutes following the start of the fixing for informed traders. We find no significant impacts or returns following the publication of the fixing results. Trades in the opening minutes of the fixing are significantly predictive of the price direction of the fixings, in some cases exceeding 90%. Combined, these findings support the following conclusions: that the London PM gold price fixing does have material impact on the exchange traded gold instruments, information from the fixing is leaking into markets prior the fixing results being published, and there exist economic returns for trading on these information leaks."
There is, frankly, no news here. Still, it's good for the bullion banks, and all market participants who can reference or trade at that daily price, to have the Fix validated like this. The London Gold Fix is a process of price discovery. The final number announced is a result of activity, not front-running.
A market benchmark doing its job in short.
Buy gold at the lowest prices in the safest vaults today...
Abdullah Bin Mohammad