London gold fix still does the job
Improvements can be made to enhance the accountability and governance of the process
The Chinese expression "real gold is not afraid of the melting pot" suggests that if you have genuine quality, then you will not fear adversity.
Well, in that sense, the London gold fix, an institution with a history going back nearly 120 years, is facing its own test as regulators question whether the process is "fit for purpose".
The gold fix is in essence a benchmark price that is derived twice a day from actual trades all concentrated into a short space of time to determine an objective price for gold.
The fix affords the participants far more protection than more traditional auctions
Of course, prices are also being set in trading outside the London fix, but these prices are subjective as they are posted by individual banks.
The London gold fix, therefore, has two advantages: it is derived from many market participants and it provides a venue for large deals to be done.
The process is rather like an auction. The fixing chairman suggests a price to the four other fixing members, who in turn pass the information on to their clients, who pass it on to their clients, and so on, through a fixing commentary conference call.
There can be several hundred clients effectively receiving the information, and they are invited to submit their buying and selling orders, which are passed up the chain to the fixing participants. The price is then adjusted higher and lower to find an equilibrium price where the optimal number of trades can be offset.
Rather like in an auction, the hammer effectively comes down, and a new benchmark is set that can underpin thousands of contracts for the buying and selling of gold around the world.