The economic groundwork for London to become the centre of the global gold trade was laid as early as 1694, when the newly founded Bank of England appointed the Mocatta Bank as its exclusive gold and silver broker. It took another 225 years for the so-called Gold Fix or Gold Fixing, the determination of the world market price for gold, to be conducted on the London Bullion Market for the very first time. A new market structure which still exists today, it was introduced on 12 September 1919 at the request of the Bank of England. It significantly increased transparency on the gold market and limited trading margins for buyers and sellers. Since then, the Gold Fixing, which is carried out twice a day, has been the reference price in OTC trading of physical gold. In addition to gold wholesalers, refining and mining companies, most central banks also use the price established in the Gold Fix to update the value of their gold reserves. The London gold price is also used on the gold derivatives market to value swaps and options.

Price transparency: not a state, but a process

Initially, Gold Fixing was carried out by no more than five London money houses, the bullion banks, all members of the London Bullion Market. The banks’ traders initially met only once a day at 11:30 a.m. CET in the rooms of the Rothschild Bank to compare and reconcile their customers’ buy and sell offers. The gold price, at which supply and demand were in equilibrium, was fixed and announced. Price fixing was thus based on a small part of the total gold turnover, but the resulting gold price was the general reference for OTC gold trading. As unconvincing as this concept may seem in light of the importance of maximum price transparency today on electronic, fully regulated trading venues such as Xetra^® – back then, the Gold Fix was a first big step towards trading efficiency. A step that would be followed by many others.

Continuous improvements over the following 101 years

The history of the Gold Fix is a history of process optimisations to achieve even tighter spreads in OTC gold trading, and to prevent possible abuse. In 1968, for example, a second daily Gold Fixing process was introduced, at 4 p.m. CET, making an updated reference price available when the US gold market opened. Similarly, the number of participants in the auction price discovery process grew steadily, and major gold trading market participants outside the UK also became permanent participants in the Gold Fix: today, 16 international banks participate at the auction price discovery, including the Bank of China, the Industrial and Commercial Bank of China, Goldman Sachs International and the Toronto Dominion Bank. The later ScotiaMocatta Bank had been involved in Gold Fixing since its inception, but was dissolved in 2019 following its involvement in a money laundering scandal. Regarding the Gold Fix itself, there has been only one proven case of market abuse to date: a Barclays Bank trader manipulated the gold price in 2012, which earned the bank a fine of US$44 million and led to even greater regulation of the price discovery process. The price has since been renamed the London Bullion Market Association (LBMA) Gold Price. Today, it is no longer the Bank of England but the British Financial Services Authority that is responsible for supervision as an independent body. OTC gold trading on the London Bullion Market has long ceased to take place over the phone – nowadays, it is conducted via an electronic trading platform.

The latest step towards more transparency was taken by the LBMA in September 2020: in addition to the weekly publication of the gold trading volumes by members on the London Bullion Market since November 2018, the total gold holdings are now also reported by the LBMA and the Bank of England on a monthly basis.

British pound had to give way to US Dollar

Upon its introduction in 1919, gold fixing was conducted exclusively in pound sterling – after all, Britain still dominated international trade relations at the time. From 1968, price discovery was also carried out in the US currency, which today determines gold trading worldwide, including the London Bullion Market. Since 1999, the London gold price is also published in euro and the LBMA gold price today is available in 16 currencies, including Renminbi and Canadian Dollars.

Arnulf Hinkel
Financial Journalist