A New York investor has filed suit in Manhattan Federal court against the five “market maker” banks that set the London Gold Fix. Kevin Maher claims the megabanks have colluded to manipulate the benchmark to their own advantage, and is seeking class action status. Any damages arising from a guilty verdict could be tripled under U.S. anti-trust laws.
The suit names Deutsche Bank, Barclays, HSBC, Bank of Nova Scotia and Societe Generale as plaintiffs. Twice a day, representatives of these five banks get together on a conference call while connected to their own trading desks, and relay the number of orders to buy or sell that they have at X price. If the difference between the number of bars wanted and bars offered at that price is within 50 bars (20,000 troy oz.), that price is declared the new benchmark price.
If buyers do not approximately equal sellers, the price is adjusted and orders re-polled until a match is made. Not only are the banks bidding for themselves, but certain large clients are also allowed to listen in and offer to buy or sell at proposed levels.
The current conference call arrangement began in 2004, when gold fix chair Nathan M Rothschild & Son sold their seat to Barclays. Until this time, the Gold Fix meetings were held at the Rothschild offices in London.
Most of the world’s gold-based investment products and derivatives use the London gold fix price. The gold fix is used by miners, refiners, jewelry makers and banks to settle gold contracts and value their assets. It’s also used by central banks for the same purposes. The gold fix is also used for hedging contracts, gold swaps, futures contracts and options, as well as derivatives. Trillions of dollars a day depend on the London gold fix, and fortunes can be made or lost over a shift in the price.
Maher’s lawsuit was sparked by media reports of a draft study conducted by Rosa Abrantes-Metz and Albert Albert Metz. The couple, whose research in 2008 exposed the LIBOR manipulation scandal, concluded that evidence pointed towards a manipulation of gold markets during the London fixing process approximately 50% of the time between January 2010 and December 2013. Deutsche Bank abruptly announced last month that it was no longer taking part in the London gold fix or silver fix, after news surfaced that the top financial regulating agency in Germany had requested documents related to foreign currency and precious metals practices at the bank. The chairman of the regulator, BaFin, told reporters that the level of manipulation in the forex and gold markets could be worse than the LIBOR scandal.
The London Gold Market Fixing, Ltd, has already commissioned a study to seek ways to increase the transparency of the process, which started in 1919. The member banks deny any wrong-doing, but admit that the process could stand to be updated for a modern global market where gold is traded 24/7.