The London Gold Fix: Guide, Definition, and History
The London Gold Fix is considered the authority on gold and precious metal valuations. The London Gold fix is administered by the London Bullion Market Association (LBMA). It is the process for how daily prices for gold, silver, and other precious metals are set.
The London Gold Fix is established based on the consensus between the five member banks in the LBMA. This is also known as the London Gold Pool. The LBMA banks join a daily brief conference call to establish the gold price for the day.
Most of the gold stored in London is in the form of gold bars.
The gold price is driven by customer buying and selling activity in the gold market. But when individual investors are looking at the price of gold, they usually won't refer to the London Gold Fix. You may just look at the spot price of gold which can be found through a quick internet search.
Still, for a beginner gold investor, it can be valuable to know how the price of gold is reached.
What is the London Gold Fix?
The London Gold Fix is the process of setting up gold prices on the London bullion market. The London Gold Fix involves gold traders from five of the largest bullion banks. They come together to find a consensus for a transaction price for large sales orders.
These members set spot gold prices twice a day in the morning at 10:30am, called the London AM fix and again at 3pm in the afternoon known as the London PM fix. The prices are listed in three currencies: the USD, the British pound, and the euro.
These bullion banks act on their own behalf as well as their customers’ who trade limit orders to trade on the London gold fix price. The price of the Gold Fix is unknown before it is set.
The Gold Fix is used as a benchmark for the price of gold products that is set for the day. Gold owners, gold mining companies, and central banks around the world look at the London Gold Fix to know what to expect the price of gold bullion to be. Coin dealers may also use the London Gold Fix to see how to set the price of their products.
How Does the London Gold Fix Work?
Here's the process for how prices are set:
The London Gold Fix puts out a gold fix price twice a day and a silver fix price once a day. The member banks meet on a conference call and exchange "Bid" and "Ask" prices for gold until a consensus is reached. This is done to make sure gold trades are made at a common price.
Gold fix prices are not for the general public. Rather, they are used for wholesale orders. The Gold Fix changes based on gold’s supply and demand across the member banks’ customers.
It’s important to distinguish the London Gold Fix from the spot price of physical gold—they are not one and the same. The gold spot price is the market value for one ounce of gold that can be bought and sold at right now (i.e. "on the spot"). By contrast, the London Fix is gold prices made by traders who are members of the London Bullion Market Association for very large gold transactions.
The London Gold Fix Banks
The five participating banks that determine the daily gold price are:
- Barclays Capital
- Deutsche Bank
- HSBC Bank
- Société Générale.
Each of these firms are members of the LBMA.
History of the London Bullion Market Association (LBMA)
The Bank of England established the LBMA in 1987. Gold price quotes are often based in London because the U.K. has a historical association with gold. According to the London Bullion Market Association, the London bullion market originated with a partnership between Moses Moscatta and the East India Company. They started shipping gold together toward the end of the 17th century.
After the first gold rush of 1697, gold was brought to London, which led to the Bank of England opening a London vault. This gold warehouse served, as it still does today, the European market.
Today, the LBMA sets the standard for how gold and other precious metals are refined and traded on the global markets to ensure integrity of the gold market. The companies that belong to the LBMA range from mining, refining, and storage companies as well as the big banks who trade gold bullion. This includes JPMorgan, Goldman Sachs, and ETF providers, to name a few. In order to be a member and maintain membership in the LBMA, the organization must adhere to LBMA standards.
Critics of the London Gold Fix
There has been a long-standing question as to whether the Gold Fix is fairly established. The participating members of the London Gold Fix are also among the biggest users of the gold fix. The Gold Fix is influenced by market-making banks who act as both the principle and the agent, trading gold on their customer’s behalf as well as their own.
Good Delivery gold bar, the standard used in the London gold market
A market maker can be a bank or brokerage whose purpose is to create liquidity in the gold market. They are either trying to buy at the best bid or sell at the best offer as well. The market makers’ job is to bring buyers into the market, so they have an incentive to hold off on selling until the gold price rises. This is to say that a Gold Fix market maker can achieve higher profits by trading gold that capitalizes on what they anticipate the fix price to be.
As a result, there have been concerns over bankers setting prices to their advantage. The industry has demanded more transparency of the London Gold Fix and regulation around it. You can learn more about criticisms of the fixing process on the Breaking the Dollar podcast.
Tips for Understanding the London Fix as an Investor
Don't think of the London fixing as a price tag. It's not what you will pay for an ounce of gold as a retail customer. Instead, think of it as the lowest possible price for gold which is used as a baseline for companies that produce gold products, like mints and refineries. It's simply a reference point.
These are the main takeaways:
- The London Gold Fix is how the daily gold price per ounce is set.
- The participating banks convene daily to establish the gold price twice per day.
- The Gold Fix is referenced by gold companies who are pricing their inventories.
Knowing the process of how the London Gold Fix works can help investors understand how companies involved in the manufacturing, production, and refining of precious metals like gold determine their prices. This impacts what individual investors end up paying for their gold assets.
Here are some helpful links to the current spot prices for the precious metals:
Written by Paulina Likos
Read more about the global precious metals markets with expert content from the writers at Gainesville Coins:
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