Gold News

Heat, Light & Venezuela in London Gold Manipulation

No-news flash! Regulator the FCA is looking at London gold prices. News-sites are chasing "manipulation" traffic...
 
MORE heat than light in a story from Bloomberg overnight, writes Adrian Ash at BullionVault.
 
Certain parts of the London gold market are being "reviewed" by the UK's financial regulator, the Financial Conduct Authority. Because London trade sets the world's gold benchmarks for price (notably the London Fix) as well as lending rates (known as GOFO). And where there are benchmarks, regulators must now follow. 
 
It's not an "investigation" however. So the source won't give their name, nor anything else, let alone a blunt accusation of "manipulation". Which doesn't make them much of a "source".
 
Nor is any of this news. Reuters had a better report 3 weeks ago about how the London gold trading industry, heart of the world's wholesale bullion trade, is addressing the rising temperature of regulatory interest. And at last month's London Bullion Market Association shindig in Rome, we in fact got this short presentation straight from the horse's mouth, plus this interview (via our friends at Kitco) with the FCA's Don Groves during a conference coffee break. 
 
So what's the likely impact of whatever is, or isn't, now under review? In London's wholesale gold market, GOFO is the lending rate (in fact, it's the interest rate which current owners will pay a borrower to take their gold away). Rather than being directly visible to the world at large, it is reported by the banks to trade association the LBMA, in much the same way individual banks' Libor interest rates (the interbank interest rates which banks charge each other to borrow) are reported to the British Bankers Association, which then produces a single Libor figure for the cash lending market as a whole.
 
So with GOFO, there's lots of scope for the regulator, the FCA, to ask questions. Because like Libor, the reported GOFO rate is used in other, off-the-shelf products more widely available to market participants. The value will be very much smaller than the value of business done with reference to interbank cash rates. Not least thanks to the collapse in gold lending and swapping, starting in 2003, brought about by the long bull market in prices. But you can smell the story here, if not the facts. Manipulation of Libor has, to date, led to fines worth some $5 billion.
 
The gold and silver prices Fixes, in contrast, are a market price set by client business through the 5 member banks of the London Gold Fixing Ltd, as we explained in this article earlier this year. Or alternatively, market participants can deal "spot". Although commonly cited, this doesn't in fact exist as a single, firm price. Instead, it represents the average mid-price of the 11 bullion market-making banks' firm bid/ask quotes, plus the quotes from all the hundreds of other gold and silver dealing banks, brokerages and trading houses centered in London.
 
You can see this average tracked on BullionVault's reference gold price chart here. As regards prices on BullionVault's order board, where consumers (like you and me) can trade wholesale gold and silver for instant settlement, they're freely quoted and set by our users in open competition. No other retail investment service lets you set your own bid/ask prices as you choose with any market depth or liquidity. None also lets you trade at the Daily Price, if you so wish, as achieved by the London Fixes. 
 
Again, the Fix offers a separate route to price discovery. To learn more about that global benchmark, please see the Fixing Limited's own site.
 
Meantime, and away from news-sites chasing Google hits for "London gold manipulation", there's much more important events for gold happening in Venezuela. Because the socialist paradise, of all places, is having to pawn its gold reserves to raise cash, according to local press. And it's using investment bank Goldman Sachs of all people to do it! 
 
El Banco Central de Venezuela is said to have entered into a "gold swap" agreement with Goldmans for some 45 tonnes of its 367-tonne gold reserves. Part of the 14th largest national hoard in the world is apparently being swapped for cash (which will then be swapped back, sometime in the future) because the country's foreign-exchange reserves have run down to a 10-year low, with only enough money left to fund 10 days of imports, according to a local economist.
 
Why the cash crunch? Because El Banco is desperately selling foreign currency, and buying its own money back, trying to defend the Venezuelan Bolivar Fuerte's value against the US Dollar on the FX markets. The central bank slashed the VEF's official peg to the imperialist greenback by one third at the start of this year. But the black market price (ie, the only market price, where private individuals buy and sell away from the politicos' diktat) puts the devaluation nearer 90%.
 
So after making such a fuss about " taking its gold home from London" under the late Hugo Chavez, the Central Bank of Venezuela is now turning back to the London gold market to mobilize the value of its reserves. 
 
London regulator the FCA is part of the Bank of England. Maybe Venezuela will email the Market Abuse team about the swap rate it got in that deal with Goldmans, you might ask. But that was, by all accounts, a direct deal between two consenting parties. Enquiring minds might further wonder who's playing the end-borrower of those 45 tonnes of gold apparently swapped out by El Banco. With gold prices falling so hard in 2013, many smaller mining companies have reportedly been looking to sell gold now, borrowing it with a view to repaying that bullion debt with forward mine production in the future. And with gold prices down so hard after emerging-market economies started to build their reserves during the metal's unstoppable 12-year rise, many more of those central banks might also be looking to "mobilize" their holdings, getting a rate of return via the gold lending market in London.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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