Evidence Emerges that London Gold Fix was Manipulated by Major European Banks

Michael Teague  |

The London interbank offered rate, perhaps better known by the acronym Libor, became the center of a major controversy in 2008 when it was discovered that the world’s major financial institutions were acting in collusion to manipulate the recognized benchmark that sets rate at which banks are charged when borrowing from one another.

Six billion dollars in fines have so far resulted from the scandal, as well as a deluge of regulatory probes and investigations into the broader rate-setting business that has found malfeasance and bank collusion to be a substantial factor in benchmark pricing, particularly in commodities markets.

This was reiterated again on Friday as the findings of a draft research paper co-authored by an NYU Stern School of Business professor and the managing director of Moody’s Investor’s Service hit the headlines with compelling evidence that one of the most common global pricing references for gold had been tampered with by banks.

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The London gold fix sets spot prices for trading in yellow metal, and is used by central banks, miners, and jewelers alike. The paper, as yet unpublished, suggests that Barclays Plc ($BARC), Deutsche Bank (DB) , the Bank of Nova Scotia, HSBC Holdings Plc ($HSBC), and Societe Generale SA, the five banks who have overseen the establishment of the gold fix for over a century, have been acting in concert to manipulate the benchmark to their advantage much the same as was done with London’s interbank rate.

The gold fix is set twice a day via teleconference between the five banks, at 10:30am and then again at 3pm, but is not subject to any sort of oversight despite the fact that the institutions can and do trade metal and derivative products during the call.

One particularly damning piece of evidence included in the report is a survey of intraday spot-trading between 2001 and 2013 that found that starting in 2004, major fluctuations in gold prices occurred with suspicious frequency during the afternoon fix call between the banks. Furthermore, these large price moves were moves downward in the overwhelming majority of cases. While the draft report suggests concludes that enough evidence exists to suggest manipulation, it will be left to regulators such as Britain's Financial Conduct Authority to unearth specific details, such as why the price swings took place during the 3pm call and never the 10:30 am one.

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