Fixing The Fix
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Submitted by Gary S. Wagner on Friday, January 17, 2014 - 16:17.
Fixing The Fix
Bargain hunters stepped into the gold market today. More likely they are Johnny-come-latelys who smelled money on the table. The week's trading pushed gold up overall by 0.4%.
Of concern for all gold and silver traders is the increasing scrutiny under which the centuries-old "London fix" is falling. (The current fix process dates to 1919, but London's silver price setting goes back to the introduction of the pound sterling, at least.) A European regulatory agency, BaFin (in German - Bundesanstalt für Finanzdienstleistungsaufsicht) became the second large investigatory body in the world to question whether the prices set by a handful of large banks are open to manipulation.
The U.S. Commodity Futures Trading Commission (CFTC) has been looking into the same matter since March of 2013. As the scrutiny has increased, some of the big banks that actually set the fix have had doubts on participating, and today Deutsche Bank said it was dropping out of the conference. You have to wonder if they smell smoke over in the Fatherland.
The fear among regulators is that there will be repeat of the LIBOR rate scheme that went on from 2001 until the scandal broke in 2012.
Bafin President Elke Koenig said on Thursday, "It's understandable that this topic is making big waves. Markets depend on the trust of the wider public that they are performing and that they work honestly."
Others were quick to defend the London gold/silver fix.
"The fix is one of the most open market pricing mechanisms in existence," Rhona O'Connell, head of metals research at Thomson Reuters GFMS, said. "It is not a LIBOR clone."
O'Connell is right in one respect. LIBOR is based on estimates and non-concrete concepts. The gold and silver pricing is based on real transactions and orders.
It seems strange to us that even though there was a positive housing report - in the brave new world that means that the decline in new housing starts wasn't as big as anticipated - gold reacted positively. Solid housing means more jobs, which in turn means a higher likelihood that the FOMC will trim asset purchases again.
There are other reasons afoot though that gold seems to want to rise but ultimately can't find direction fundamentally speaking. The stock markets in the developed world have been struggling and our opinion is that investors are becoming a bit shy of such high prices. The steep decline in 2008 is still a festering wound among many.
And, you can be sure that many retiring or soon to be retiring people have a low risk appetite for anything slightly messy in equities. Just to put it in perspective, each DAY, in the EU and US combined, 20,000 individuals reach retirement age. If you were in that position, would you be buying into an already high-priced stock market? And then there are those who had to defer retirement for 3 to 5 years because of the deflating of equities in the decade just passed.
Speaking of deflating. Our sense is that deflation is still an enormous incoming bogie on the radar screen. Another big question - one for the next 20 years: "Will the Fed be able to capably lay off the trillions of dollars in assets that they have accumulated through quantitative easing?
As always, wishing you good trading,
Gary S. Wagner - Executive Producer