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They're Manipulating Gold Prices!

Investigation into London Gold Pricing

Written by Brian Hicks
Posted March 18, 2013

The price of gold is a very heated topic among investors, and U.S. regulators are scrambling to determine whether or not prices are being manipulated by the world’s largest gold market, London.

CNBC reports that a top U.S. regulator has begun initial discussions to look into the daily price settings on gold and silver in London and whether or not manipulation may be at play.

A formal investigation has not been implemented by the Commodity Futures Trading Commission (CFTC), although certain aspects of price fixings are being examined, as CNBC reports. The CFTC wishes to ensure that there is appropriate transparency in London, as the possibility that it has fallen by the wayside is becoming increasingly clear.

British banks don’t exactly have the best track record in recent years when it comes to transparency and manipulation. In 2012, the Libor rigging scandal was manipulation by British banks on a large scale, a list that includes Barclays and other prominent institutions.

Global regulators have been keeping a close eye on price fixings throughout the world since the dawn of this scandal, and the latest presumptions that there may be dishonesty in the pricing of precious metals is an extension of these fears.

It’s important to gain an understanding as to how the price of gold is set, as many people are somewhat in the dark regarding details. Five banks set the price of gold via teleconference twice a day, as the Guardian reports, with three banks setting the price of silver.

Because of the way that these fixings are presented, it’s entirely possible that a lack of transparency could lead to manipulation. The fact that UK banks have a major role in setting the price of gold and were also part of the Libor scandal elevates concerns among regulators even further, as trust has still not been entirely built back up since last year’s event.

At the beginning of each pricing conference, an opening price is announced by the chairman, which is then relayed to the other four banks. The banks then declare themselves buyers and sellers based upon orders received, according to the Guardian.

The price is then moved based upon a number of factors, such as whether there are only buyers or only sellers. Pricing continues to move at this point during each daily fixing until a balance has been reached. The fixing of gold prices in London dates back to 1919, and silver fixings date back to 1897.

While the method of setting gold and silver price standards already seems a bit unusual, it’s not just UK pricing that is being affected. The daily teleconferences set price fixings on gold not only in Britain but throughout the rest of the world as well.

Barclays, HSBC, SocGen, Deutsche Bank and Scotia-Mocatta are all involved in setting the price of gold and silver on a daily basis, according to Investment Week.

Last year, Barclays was hit with a 290 million pound fine for its role in the Libor scandal, according to the Guardian. Royal Bank of Scotland has also found itself paying a hefty fine for its involvement, reaching a whopping 390 million pounds.

The daily fixings of gold pricing has a dramatic effect worldwide. As one might expect, jewelry prices are of course affected by these changes. The fixings also affect mining companies, however, as they influence the price at which these companies are able to sell raw materials to refineries.

While it doesn’t appear that there is any concrete evidence gold pricing is indeed being manipulated, regulators simply don’t want to take the risk given the fact that the Libor scandal had such long-standing repercussions last year.

Since UK banks have such a huge impact on the worldwide price of precious metals, the scrutiny is quite understandable. If investigations had not occurred in 2012, it’s possible that the Libor scandal may not have been uncovered. Many fear that the same possibility exists with the pricing of gold and perhaps even silver, although it’s too early to tell at this point if there is any credence to this notion.

One thing is for sure, however: regulators are not going to take the chance of letting manipulation occur without first looking into the situation thoroughly.  

 

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