Something Strange Happened During Yesterday's London PM Gold Fix

Something strange happened during yesterday's afternoon London fix: as gold was surging on a spike in geopolitical fears, which slammed the USDJPY below 110 and sent traders scrambling into safe assets such as TSYs, London's gold price benchmark waterfalled lower before fixed some $12 below the spot price on Tuesday afternoon as "the auction appeared to become locked in a downward spiral", according to Reuters.

From an initial $1,265.75, close to the spot price at 3pm London time, the auction price ratcheted steadily lower, with the gold price sliding by roughly $1-$2 increments every 30 seconds, before fixing at $1,252.90 in the ninth and final round. From the fifth round to the eighth the bid and offer volumes remained frozen, unable to match.

As Reuters notes, and as shown in the table below taken from the website of the auction's administrator, Intercontinental Exchange, only five banks took part in the auction on Tuesday afternoon, out of 14
officially accredited participants.

The dramatic divergence between the spot price and the London fixing for Tuesday and several prior days is shown in the chart below.

A chart of recent divergences between the PM fix and spot prices shows that yesterday's event is not isolated, and has in fact taken place on several occasions in the past, if not to the same extent.

The fat finger, or perhaps simple manipulation for which the London Fix has received so much media scrutiny over the past 4 years and prompted a thorough overhaul of the gold fixing process, came a day after ICE introduced clearing for the LBMA Gold Price auction, which sets the benchmark used by gold consumers and producers worldwide, before several participating banks had the necessary systems in place. As a result, China Construction Bank, Societe Generale, Standard Chartered and UBS are yet to confirm a date for their participation in the cleared auction, according to a notice on the LBMA's website.

So what caused the waterfall selling during the PM Fix, which could have been a simple fat finger, or alternatively a coordinated attempt to prevent the fix from hitting a certain threshold price which would havestopped out one or moreLondon fix members from existing stop positions?  It is unclear: according to Reuters, the ICEdeclined to comment. The LBMA, which owns the intellectual property rights to the auction, was not immediately available to comment. We don't expect this particular gold pricing "incident" to get much media focus.