LBMA PM Gold Price Set $15 Below Spot Market
(Kitco News) - Gold buyers, settling contracts using the London Bullion Market Association PM Gold Price, got a great deal Tuesday as the benchmark ended up being set almost $15 dollars below where spot prices were trading at the time.
The PM Gold Price, which comes out around 10:30 a.m. showed a benchmark at $1,252.90 an ounce; however at the time, spot gold prices were trading around $1,267 an ounce, with prices heading towards a new five-month high.
In a statement to Kitco News, the LBMA said that it is currently reviewing what happened during the PM auction. ICE Benchmark Administration, the administrator of the electronic auction did not respond to an email from Kitco News.
The large discrepancy between spot and the benchmark once again put the market’s transparency in the spotlight; however, Jeff Christian, managing director at CPM Group, a leading commodity research firm, said that he doesn’t see it as nefarious manipulation but the effects of poorly conceived regulations and a faulty price discovery mechanism.
He said that the problem is that the auction process still relies on market participants to provide liquidity. However, because of regulations, banks and other financial institutions are backing away from becoming market makers. This has resulted in a sharp reduction in liquidity during the auction process, creating a large discrepancy in prices.
“It’s not just happening in the precious metals markets it is happening across all commodities. We saw this trend starting in 2001 and in the last 15 to 16 years it has only gotten worse,” he said.
According to the LBMA, there are only 10 firms providing bids during the electronic auction: Bank of China, Bank of Communications, Goldman Sachs, HSBC Bank USA NA, Industrial and Commercial Bank of China (ICBC), INTL FCStone, JPMorgan Chase Bank, N.A. London Branch, Morgan Stanley, The Bank of Nova Scotia – ScotiaMocatta and Toronto-Dominion Bank. of those members, only five firms actually participated in the auction. Four other banks are scheduled to join the auction but no deadline has been set.
“There is something wrong with the process. You have a working spot market and then you have to stop that to then go over to this auction,” said Christian. “It just doesn’t make sense.”
This isn’t the first time the LBMA has had problems with its benchmarks. Last year silver made headlines after its fixing price was well outside the market price.
While the use of the fix has lost some relevance over the years, Christian said that it is still important for some gold market participants. He added that discrepancies like this hurt the markets’ credibility.
Instead of using an auction process, a simple solution, according to him, would be to use the current spot market and use the average of prices traded at 10:30 a.m. EST as the benchmark.
The LBMA Gold Price was introduced in 2015 after it was announced that the London Gold Fix was terminating its telephone-based auction process. The benchmark auction has come under intense scrutiny in the last few years after some research showed alleged manipulation during the process.
In December, Deutsche Bank agreed to pay $60 million to settle gold manipulation lawsuit. The bank also agreed to provide evidence to help the plaintiffs to pursue claims against the other defendants.
In October, a New York judge ruled that the lawsuit had merit and could move forward. Judge Valerie Caproni of the US District Court, said in her opinion that the plaintiffs "plausibly allege that each of the Fixing Banks acted recklessly in creating artificial price dynamics in the gold markets around the PM Fixing."