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The new electronic gold price fixing that was introduced two years ago is still problematic, according to reports Reuters. There is still too little gold trading on this new platform, with the result that volatility remains too high. This creates uncertainty for traders, producers and buyers, who conclude contracts on the basis of this reference price.
In the past, the reference price for gold was set twice a day by a group of just five banks. However, the way in which the price was fixed was not very transparent and susceptible to manipulation, which led to a new electronic fixing under pressure from regulators.
With this electronic fixing, more banks gained access to the daily bidding process, but due to an adjustment to the electronic trading platform in April, four of the fourteen banks could no longer participate in the bidding process. That immediately caused problems, because the next trading day a fix was achieved that deviated $12.20 per troy ounce from gold that was traded on spot that day. A deviation of 1% doesn't seem like much, but in gold trading, that can make the difference between a profitable deal and one that doesn't pay off.
Analysts at Reuters studied the data from the electronic trading platform and concluded that a quarter less gold was traded in the first three weeks after launch than in the last three weeks of the old fixing. Also, the eventual fixing under the new platform had on average a deviation from the spot price three times as large as the old fixing.
The company Intercontinental Exchange (ICE), which is responsible for the fixing, decided on April 10 that the gold contracts traded during the fixing must also be settled immediately, the so-called ClearingNot all banks were prepared for this, as China Construction Bank, UBS, Standard Chartered and Société Générale stopped participating in the fixing. A survey by Reuters among various banks showed that the lack of the necessary ICT systems was the cause in many cases.
Another problem that causes volatility is that participants in the Gold price Fixing are reluctant to provide liquidity during the bidding process, because they fear that the regulator will see that as price manipulation. Partly due to the tightened supervision, Deutsche Bank decided to withdraw completely from gold price fixing.
Gold price fixing has been an important benchmark for the gold sector for decades, but due to the speed with which the precious metal is traded today, it is more difficult to establish a single representative reference rate. The gold market in London is also facing increasing competition from the East, where China is now trading its Own gold price fixing in Chinese yuan.
Gold price fixing remains volatile
