U.K, German Regulators Scrutinize Gold, Silver Pricing

November 27, 2013 at 09:10

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The price-setting processes for gold and silver in the spot market are the latest to come under review from global regulators, with authorities in Europe investigating the mechanisms for both precious metals.

In the U.K., the Financial Conduct Authority is reviewing how the gold price is set, said a person familiar with the investigation, who added that it is at an early stage. In Germany, the Federal Financial Supervisory Authority, or BaFin, is looking into the rate-setting processes for gold and silver, according to a representative at the regulator.

The probe into precious metals markets adds to a long list of global investigations into the possible manipulation of some financial markets. Authorities are also examining the price-setting mechanisms for oil, currencies and interest rates.

The U.S. Commodity Futures Trading Commission raised the matter with the FCA in discussions early this year, telling U.K. financial regulators the London gold fix was worthy of scrutiny because the process appeared to lend itself to abuse, according to a person familiar with the matter. The CFTC hasn’t taken any action in the matter, the person said.

Gold in the spot market is traded over the counter 24 hours a day, and there is no central source for data on prices at which it changes hands. Each morning and afternoon in London, a group of market participants determines a snapshot of the price. The London fixings are determined by units of five banks: Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Societe Generale. Gold futures, by contrast, are traded on exchanges. None of the banks has been accused of wrongdoing.

In the conference calls, bids and offers—on behalf of the banks and their clients—are exchanged and then adjusted up or down to reflect the number of buyers and sellers. The same process is carried out for silver at midday on a conference call with the Bank of Nova Scotia, Deutsche Bank and HSBC.

The London fixings are used to determine spot prices world-wide, for example, affecting the cost of jewelry and the prices charged by mining companies to metals refineries. The prices also help determine the value of securities tied to the metals, such as exchange-traded funds.

The spot gold market “is not as transparent as exchange-traded gold,” said VTB Capital commodities analyst Andrey Kryuchenkov. “It’s a very liquid and large market, so there will be some more scrutiny.”

Prices have been determined in this manner in London since 1919 for gold and 1897 for silver. London has been a gold-trading center for centuries.

HSBC, Société Générale and Deutsche Bank declined to comment. Barclays couldn’t be reached for comment.

In an emailed statement, a spokesman for Bank of Nova Scotia said the bank has “effective policies and practices, a deeply-rooted compliance culture and a drive to continually look toward ways to improve upon our existing processes and practices. All our business activities meet or exceed these standards.”