On Monday lawyers for a number of linked plaintiffs appeared in a US Federal Court in order to co-ordinate their class action against the five banks on the London gold fix panel in relation to the alleged price fixing of gold.
A former precious metals and precious metals derivatives trader, Kevin Maher, is leading the suit on behalf of investors who held or traded gold and gold derivatives that were settled based on the London gold fix from 2004 to date.
The London gold fix has been largely unchanged as a process since September 1919, although the original panel has changed over time from NM Rothschild & Sons, Mocatta & Goldsmid, Samuel Montagu & Co, Pixley & Abell and Sharps & Wilkins to the current panel of Barclays, Scotiabank, Deutsche Bank, HSBC and Société Générale. Deutsche Bank has announced that it will be leaving the panel from 13 May 2014.
The price of gold is fixed during a telephone call between the panel banks. During this call the chairman announces an opening price to the other four members who then relay this price to their customers. The banks receive orders based on this price and then declare themselves buyers or sellers. If there are both buyers and sellers at that price, panel members are asked to state the number of bars they wish to trade. If there are only buyers or only sellers at the opening price, or if the numbers of bars to be bought or sold does not balance, the price is moved until a balance is achieved.
The civil action alleges that the method by which the price of gold is fixed is flawed for two reasons: it is unregulated and the member banks are able to trade gold during the process.
Maher has stated publically that his motivation in bringing the suit is the perceived lack of oversight from the US government and regulators on this issue. The merits of the suit remain to be seen, and the panel banks will have to wait to see if the suit sparks the interest of the regulators, or forces them into action.
In the UK there have been reports that the FCA is conducting a preliminary review of the gold benchmarks, of which the London gold fix is one. The reports suggest only an interest at this stage with no indication that a full scale investigation will follow. However the issue is clearly on the UK regulators’ radar.
Will the London Gold Fix become a scandal to rival Libor or FX? Whatever happens, the next few months will see the methodology and practice of the fixing of various commodity prices increasingly under the spotlight.