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In the last couple of weeks, we’ve noticed the variance of the gold Fixing price and the open market price. In the past, the two tended to dovetail giving the appearance of synchronicity. But in the last week, open market prices have tried to take the gold price down only to be pulled up by the price established at the London gold Fixing.
There is a structural change happening in the market, bringing the relevance of the physical market to a far more important pricing role that it has had before. As with other markets, it is the small amounts of gold sought after in the open markets –to top-up unforeseen needs, as opposed to the amounts directly contracted with suppliers that dictates the gold price. With these alterations, that pattern is beginning to change. Why?
First we look at what the Gold Fixing is and why it’s important, then at the speculative trading hedging gold/silver markets on COMEX to see what influence they’re having on the precious metal prices.
These are prime gold bullion banks, globally. Their role in the Gold Fixing assures that because it’s at this Fixing, that 90% of the world’s physical gold transactions are transacted. The reason lies primarily with the processes involved that ensure that these gold buyers and sellers achieve a price for gold that’s the most accurate reflection of the current supply and demand for gold.
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There are two Fixing sessions –one in the morning at 10.30 hours GMT and then, to ensure inclusion of U.S. participants, one at 15.00 hours GMT. In these, the five members used to sit linked to their offices and looking at each other in a fairly small room, each with a desk on which there is a flag. Now they are connected to each other through a dedicated conference line, while also connected to their clients, who are kept informed of the price as it’s moved in line with the buying bids and selling offers.
At the start of each fixing, the Chairman announces an opening price to the other 4 members who relay this price to their customers, and based on orders received from them, instruct their representatives to declare themselves as buyers or sellers at that price. Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade.
Bear in mind that each member’s office is netting out the orders in the office and only submitting the ‘net’ order to their dealer at the Fix. If at the opening price, there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved, and the same procedure is followed until a balance is achieved. The Chairman then announces that the price is fixed. It should be noted that the Fix is said to balance if the buy amount and the sell amount are within 50 bars [2000 ounces, 400 ounces each] of each other. The Fixing will last as long as necessary to establish a price that satisfies both buyers and sellers.
Customers may leave orders in advance of the Fixings. Alternatively, they may choose to be kept advised of price changes throughout the Fixing and may alter their orders accordingly at any time until the price is fixed. To ensure that the price is not fixed before the member has had an opportunity to communicate any changes each member has a “verbal” flag. As long as any flag is raised, the Chairman may not declare the price fixed. These negotiations go on for as long as it takes to reach a balance of demand and supply. It appears that the longer the time taken to Fix the gold price, the larger the amount of gold being dealt.
This ensures that every buyer or seller of gold gets not only the best price at that time but also allows large orders to be met without driving the gold price one way or the other by dealers with limited amounts to supply or provide as is the case outside the Fixing.
For instance, when the SPDR gold Exchange Traded Fund buys gold for its shareholders, it buys through HSBC, a gold Fixing member who holds it in its vaults for the shareholders.
This is how gold has a global but centralized market.
COMEX
It may seem reasonable to you to assume that the ‘net’ position on COMEX would be covered by COMEX actually ensuring that this amount of gold or silver is held in one of their four COMEX-approved depositories, all located in New York City. After all, delivery of the gold and silver is affected via electronic warrant. This would reassure us that COMEX dealings did affect the gold or silver price, would it not? After all, supposing someone went short and could not deliver –who would supply the metals? The implications: COMEX is constantly adjusting their gold & silver holdings to make sure that no-one would be left without the metal they bought there. Not so!
Find COMEX warehouse stocks on a daily basis on its website: http://www.cmegroup.com/trading/energy/nymex-daily-reports.html
