Chirag Mehta, Fund Manager - Commodities, Quantum Mutual Fund, shares his views on the discontinuation of the London Gold Fix.
London is the centre of the world's physical bullion trading. The London Bullion Market Association, or LBMA, which was developed over hundreds of years sets and maintains the very highest standards in refining, documenting and storing every gold and silver bar allowed to circulate at "spot prices" in the professional market.
In order to allow for greater transparency and easier tracking of submissions and bringing depth to the price discovery of the gold, the historic London Gold Fix will be discontinued and replaced by the LBMA Gold Price, from March 20, 2015.
The traditional process via a secure conference call will change to a new electronic LBMA price-discovery process. The price will continue to be set twice daily (at 10:30 and 15:00 London GMT).
The new LBMA Gold Price will be operated and administered by an independent third party provider, ICE Benchmark Administration (IBA), who was chosen following consultation with market participants. IBA will provide the price platform, methodology as well as the overall administration and governance for the LBMA Gold Price. The IBA's new electronic platform provides an auction-based, tradeable, auditable and fully IOSCO-compliant solution for the London bullion market
The main features of the electronic auction process for the LBMA gold price are:
• Independently administrated and tradable
• Electronic and physically settled
• Aggregated and anonymous bids and offers published on screen and in real time
• Conducted in U.S. dollars
In my view this process will provide significant enhancements to the process of setting the LBMA Gold Price.
Transparency
It should bring more transparency to the market.
We are not claiming that banks meddled with the gold market, however the change is coming after a big investigation into a number of global benchmarks set behind the closed doors, like the rigged Libor.
Greater participation
More participants will be involved into setting the benchmark price of gold. There will be 6 entities providing the data used to establish the daily gold price. Five of these are Barclays, HSBC, Scotia Bank, Societe Generale and UBS, with more participants expected to join the league in the coming future. More participants should provide larger transparency. The more players, the harder to collude to set the price.
Positive for gold prices
The new gold price mechanism may be positive for the gold prices. Why? A few Chinese banks (three of them are already LBMA members) are likely to participate in setting the gold prices. It means that Chinese clients will have a more direct influence on the international price of gold. This is important because the Chinese are large purchaser of gold in the last few years.
It is an open secret that the gold prices trade on average at higher price levels during the Asian trading hours than during the London and New York trading hours. We hope government takes an open view of enough Indian banks to participate given that India is the largest consumer and importer of gold.
In India, the Securities and Exchange Board of India, or SEBI, had earlier notified that the gold held by a gold exchange-traded fund scheme shall be valued at the AM fixing price of LBMA in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand which will now be LBMA Gold Price. Thus the valuation of the gold held for your Quantum Gold ETF will be fixed using the new benchmark price as mentioned above.
To conclude, the key takeaways for gold investors are that the new gold price mechanism should bring more transparency to the market and may strengthen gold prices. It will not cause a parabolic spike in the gold prices, however it may provide long-term support by ensuring larger transparency and stability and, thus, giving a reason to value-oriented investors to own gold. Gold, after all, is a good portfolio diversification tool and helps reduce overall portfolio risk.
