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How the London Gold Fix reflects marginal demand & supply of gold...
The FURORE surrounding the London Gold Fix is unfairly, we believe, writes Julian Phillips at The GoldForecaster.
The Fix is a singularly determined attempt amongst commodity markets to set a twice daily price that does reflect demand and supply of gold, at those moments. To understand this we have to see what happens at the Fixing sessions.
The five banks involved in finding the morning and afternoon Fix gold price open a conference line to each other at 10.30am and again at 3.00pm. At the same time, each bank opens their lines to contact their main clients, who could include mining companies, refiners of gold, jewellers, investors, gold dealers and all the main professionals in the gold market.
In turn these professionals can open their lines to their main clients, who again could include central banks as well as wealthy individuals and other gold markets. These then react to a price put up by the Chairman of the Fix, representing his bank. This price is sent down the lines and each participant states the amount they would be net buyers or sellers of at that price. Each bank 'nets out' the demand and supply among its own clients before passing on the net order to the Fixing.
At each price, orders down the line change, changing the net balance, and so the price is adjusted accordingly. Once the market is agreed upon a particular price, with net orders balances, all transactions are done at that price. 
However, the amounts dealt do not include all the gold bought and sold in the market at that time. Many dealers, miners and jewellers refer to the Fixing price of gold, and contract to deal at a price that reflects, usually, the afternoon Fix. This is deemed to be the most reflective of global demand and supply, at that particular moment, in time. But the fact that amounts of gold are dealt outside the market, with reference to the Fixing price, tells us that much of the world's gold and supply does not go through the London market.
The claim that 90% of gold's demand and supply goes through the London market is therefore conjecture, not fact. It is impossible to say just how much gold is priced by reference to this Fix and not dealt in the market place, but it is substantial.
For instance, we believe that the bulk if not all of China's internal gold production does not pass through the Shanghai Gold Exchange, but is sold directly to the agency that buys gold for the People's Bank of China. This is around 430 tonnes per annum currently. These miners, it is thought, are paid in the Yuan equivalent of the Gold Fixing price. Refiners selling directly to clients (who can be central banks dealing directly with them, banks taking stock, for delivery to markets elsewhere, large jewellers seeking a reliable, regular, source of gold, etc.) will follow the same practice.
Most gold-backed US exchange-traded funds use the London afternoon gold fix to calculate their net asset value, which in turn is used by ETF custodians to calculate their fees. The US Mint and Royal Canadian Mint also price their products based on daily London PM Gold fix, or average weekly fixes. Many miners are active listeners to the fixing process as sellers.
Therefore, as it the case with most commodity markets, the amount of gold actually bought and sold during the Fixing may well reflect the marginal demand and supply that falls outside the large contracts due to unforeseen changes in demand and supply. It is also where speculators who deal in physical gold buy and sell often to support their positions in the futures and Options markets on Comex in the US.
The Comex, while a huge financial gold market, only sees around 5% of these contracts result in a physical movement of gold. That's after one party or the other gives notice that he wants physical delivery or supply.
Charges that insider trading goes on in the Fixing, we believe are false. What does happen is that clients accessing the Fixing process then deal in the gold market on Comex on the basis of the process. Add to this high frequency trading, and you can see where the profit opportunities are.
But we believe that few of these operators would risk dealing in physical gold in the Fixing, as that may work against them, increasing their risks. More profit lies in dealing in futures and options, on the side and away from the physical market, we feel. 
Hence the changing daily prices at the Fix, while not representing the total amount of gold bought and sold, are the only reasonable reflection of the current gold price. We therefore expect that price to be treated as a reliable reflection of the current demand and supply of gold.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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