The market is abuzz with the rumor that the Industrial and Commercial Bank of China (ICBC) will make a bid by proxy to purchase Deutsche Bank’s seat on the London Gold Fix, becoming one of the five banks who set the world’s most important benchmark rate for gold.
ICBC, which is the largest bank in the world by assets, is owned by the Chinese government. It is one of only two Chinese banks that are members of the London Bullion Market Association (LBMA). Although it has been in the precious metals business since 2009, and has millions of retail customers in China, ICBC is not a “market maker” in the London markets (a prerequisite for inclusion in the gold fix association).
The solution to that problem is found in its recent acquisition of a controlling 60% interest in Standard Bank’s London-based global markets division, with an option to purchase another 20% stake within five years. Known as Standard Bank PLC, the division is involved in trading commodities and currencies, as well as fixed income, credit and equity financial products. It is already a member of the London Platinum and London Palladium fix, so is already considered a market maker for those metals. (ICBC also owns 20% of parent company Standard Bank Group Ltd, based in Johannesburg, South Africa.) Being the first non-Western bank to achieve membership to the London gold fix would be a huge mark of prestige for ICBC, and by extension, for the Chinese government.
Mega banks Goldman Sachs and JP Morgan, who are market makers in their own right, would normally be front-runners for inclusion in the exclusive London club, have not expressed interest in buying Deutsche Bank’s seat. Both have been mired in several investigations by financial regulators, and neither has any intention of making themselves targets for the ongoing international probes into precious metals manipulation. It was investigations into currency and precious metals manipulation by Germany’s top regulator that led Deutshe Bank to announce in January that it was no longer going to participate in the London gold fix.
Deutsche Bank has held its seat on the gold fix committee since 1994, when it purchased Sharps Pixley. This is the first time a seat on the gold fix has been sold since 2004, when N. M. Rothschild & Son, the founder of the gold fix in 1919, sold its seat to Barclays. The present members of The London Gold Market Fixing, Ltd are Bank of Nova Scotia, Barclays, Deutsche Bank, HSBC, and Societe Generale.
Although gold is now sold around the clock, the London gold fix is used by companies and government entities around the world to price their gold holdings, enter into hedging contracts, and set rates for other products.