MarketEye By William Hanley


(From The Financial Post - Feb. 17, 1996. The price of gold was $405.00 falling back from a recent high of $419.00)

LONDON - The financial district known here simply as The City is a hotbed of the loyal Order of the Masons, who have a penchant for strange rituals.But Masonry has nothing to do with an odd little ceremony performed twice every day in an office at N.M. Rothschild & Sons Ltd.

Five men talk on their phones for 10 minutes or so and then lower tiny Union Jacks sitting on their desks. And that's it. The London gold fixings is complete. It takes place at 10:30 a.m. and 3 p.m., like clockwork. The same ceremony has been performed the same way, in the same place, and with mostly the same firms participating since the first gold fixing was enacted at Rothschild in St. Swithin's Lane on Friday Sept. 12, 1919.

Anachronistic or not, it works to give the market a snapshot of the spot price of gold at a particular moment in time.

On Friday afternoon, the price was fixed at US$404.85, up from US$403.05in the morning and US$404.60 at the late fixing Thursday, giving heart to gold bugs who are determined to keep an ounce of bullion above the US$400barrier that took so long to hurdle.

When the five representatives met at Rothschild on that first Friday in 1919, gold was fixed at four pounds, 18 shillings and nine pence- abut US$7.50 in today's terms. The quoted currency was changed to US$s in 1968,but very little else has changed in the intervening 77 years.

The participants at the first fixing were from Rothschild, which chaired the meeting and every subsequent one, Mocatta & Goldsmid, Pixley &Abell, Samuel Montagu & Co. and Sharps Wilkins. This Friday, the firms represented besides Rothschild were Deutsche Bank Sharps Pixley, Midland Bank, Republic Mase Bank and Standard Chartered Bank-Mocatta Group. So three of the original five are still showing the flag.

International gold trading is an around-the-clock business, with the London Market overlapping those of the Far East in the morning and New York in the afternoon. London bullion traders can make deals from about7:15 a.m. to 7:15 p.m.

But twice a day the representatives meet face to face at Rothschild to trade gold for physical settlement. The dealing unit is a Good Delivery Bar, which must weigh about 400 ounces and conform to specifications set down by the London Bullion Market.

The chairman suggests an opening price, which is reported by the representatives by phone to their dealing rooms. The chairman then asks who wants to buy and who wants to sell and how many 400-ounce bars they wish to trade. If the quantities fail to balance at the opening price, the chairman suggests a higher or lower one until a balance is achieved. Then he announces the price to be fixed.

The dealing rooms can alter instructions to their representatives at any time during the proceedings and that's where the tiny Union Jacks come in. The representative signals he is changing his declared interest by raising his flag. The chairman can't declare the price fixed unless al the flags are down. All this sounds very quaint and out of touch with computer-driven markets, but up to 20 tonnes of gold a day is thought to be traded through the fixing.

Gold's performance this week, staying above the breakout point of US$400after falling back from a recent high near US$419, is a sign that quite a struggle is taking place between the bugs and the bears.

The gold bugs reckon if the price can continue to climb from Friday's fixing, it can be taken as a bullish sign. Otherwise, it's vital that it doesn't break below US$400.

Ian Lamont, an analyst with Yorkton Securities Inc. in London, concedes that world inflation is relatively tame. Yet he says gold's future is made all the brighter by "inflation" in the U.S. stock market, where too much money is chasing too few stocks.

Lamont is sure some gold buyers are doing so as "a hedge against the runaway asset price inflation " that has gripped stock markets.

"Gold is the only financial asset to have depreciated in value in the past 15 years and it stands out as a haven against the massive price inflation sweeping through equity markets."

He believes the end is nigh for the bull market in equities and that gold offers insurance against the turbulent event.

While that's a plausible enough scenario, Market Eye still believes gold is for speculators and that gold stocks provide a better investment.Even then, they, too, look due for a healthy correction.

So Eye will keep the tiny Union Jack flying for the moment.

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