Source picture: Bloomberg
It appears that the gold fanatics were right the whole time. For at least ten years, the price of gold has been manipulated. The banks are the bad guys once more, who would have thought?!
If you work at a bank and do your job the way you are supposed to, it might be smart regardless to not talk about your professional activities when you are at a party this week. Although there are 'only' 5 banks involved in the scandal this time, the image of the whole sector will suffer again.
The rumor that the gold price was being manipulated had been going around for quite some time and, surprise surprise, it was true! It would be impossible to draw a different conclusion after reading the demolishing report from New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Moody’s Investors Service's Managing Director Albert Metz. The words in the report were carefully chosen, leaving room for interpretation, although no one will be fooled.
If it looks like a duck, quacks like a duck, flies like a duck, well, it is a duck then, isn't it.
Gold price: decades of fixing
The process of gold fixing, which is the setting of the gold price twice each business day, just screams for manipulation, conspiracy and corruption by the banks involved. And the empirical data that was used from 2001 to 2013, shows 'inexplicable price movements' from as far back as 2004 (!) during the midday fix. It probably won't surprise you that those 'inexplicable price movements' most often were downward price movements. In 2010 for example, 92 percent (!) of the large price movements during gold fixing were negative.
Gold fixing is done twice each business day, at 10:30am and 3pm London time during a conference call. It used to be done face to face, but since 2004 it is just a conference call. The fixing in itself is still done, however, and is vulnerable to manipulation. These calls between the five banks that are involved usually last no longer than 10 minutes, but have lasted up to an hour or longer.
The similarities with the fixing of, for example, the Euribor and Libor interest rates are obvious. The damage done by those events is impossible to calculate, but you can take it from us that we are talking about billions of dollars. Regular citizens are often at the receiving end of all this manipulation, as governments and its tax payers are the ones who pick up the bill all too often.
Damage: unknown
It is still too early to make a sensible estimation of the damage that the manipulation of the gold price has caused. But the story will be the same: fines will be given without any further consequence. The current old-fashioned way of fixing the gold price has seen its days however, as confidence in the process has gone up in smoke. Another method will take its place, probably with greater control and supervision.
We are curious of course, how this whole ordeal will play out. The researchers of the report are calling for a deeper investigation of the matter. They obviously want to pass on this hot potato, which is understandable. Regardless of the above, further investigation is being done in Germany already.
We predict that there will be large fines, lots of accusations and a new method for gold fixing. That, or the investigators will not succeed at producing enough evidence: considering what is at stake here, it is impossible to exclude any scenario. It is hard to surprise us these days. Ultimately, true price discovery will take hold of the gold market. That is nature's law, which can't be fixed by a bunch of bankers.
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