What is the London Fix
When discussing the price of precious metals, you may have heard the term London Fix but do not know to what it refers. This article will explain what the London Fix is and how its influence and importance to the precious metals markets have evolved over the years.
The London Fix is currently decided upon by the London Bullion Market Association (LBMA). The fix sets the daily price of various precious metals, including gold, silver, platinum and palladium. For gold, this price is set twice per day.
Who Sets The Price?
13 accredited trading banks and institutions participate in setting the price of gold. These are as follows.
- Bank of China
- Bank of Communications
- Goldman Sachs International
- HABC Bank USA NA
- Industrial and Commercial Bank of China (ICBC)
- INTL FCStone
- Jane Street Global Trading LLC
- JP Morgan Chase Bank NA, London branch
- Koch Supply and Trading LLP
- Morgan Stanley
- Standard Chartered Bank
- The Bank of Nova Scotia
- The Toronto Dominion Bank
These 13 global players in the precious metals markets execute large-scale transactions. They are why most spot gold transactions are conducted on the LBMA and are physically settled in London.
How is the Price Fixed?
In U.S dollars, the constituent members fix the gold price twice a day, at 10:30 am and 3:00 pm BST (British standard time). The silver fix occurs once a day at noon BST. Platinum and palladium both have a twice-daily fix at 9:45 am and 2:00 pm BST.
These 13 financial institutions communicate with each other, taking turns to present their current buying and selling interests at various price levels. From here, they come to a consensus as to what the current price should be. This price becomes that which spot gold will be traded at on the LBMA. The same process is conducted for each precious metal’s fix.
Most spot gold transactions for immediate delivery occur in the London trading session. This is because the facilities required for physical settlement have been in London for several hundred years.
Even by the LBMA’s acknowledgement, gold is traded globally 24 hours a day. The price continuously fluctuates as trading shifts from Asia, to Europe and North America. With the advent of the internet, anyone can view second by second changes in the price of gold and gold futures contracts.
History of the London Fix
During the 17th century, large amounts of gold were arriving in London from South America. There was so much gold that the British Government constructed the first purpose-built gold bullion vault. The Bank of England used the vault to serve the entire European market and continues to use this facility to this day. As the British Empire expanded so did the amount of gold returning to London, which only served to cement London’s position as the gold trading center of the world.
Around 1850, five banks joined forces to manage the running of London’s gold market. These five banks were N.M. Rothschild and Sons, Mocatta and Goldsmid, Pixley and Abell, Samuel Montagu and Co., and Sharps Wilkins. Together they established standards for the purity and quality of gold that would be acceptable to trade. Furthermore, they certified various assayers and meters that functioned at a high standard.
In 1919 the first gold fix to happen was at a meeting of the five-member banks in the offices of N.M. Rothschild. Gold continued to be fixed through this method until the establishment of the LBMA in 1987. By this time global markets had evolved enough that it was decided an independent entity should be responsible for storage and regulations. The 12 years leading up to the LBMAs inception had seen global participation and interest in gold pricing explode. This was primarily caused by the 1975 ruling by US President Ford that US citizens would once again be allowed to own physical gold.
The LBMA changed the fix processes in 2015. The firm decided that it wanted a more transparent approach to ensure that the fixed price was arrived at without any suspicion of collusion. The auction then became anonymous and digitized.
What does the London Fix mean today?
The London Fix today is a reference point to the market price, as well as the current sentiment of its participants. If you’re looking to trade gold it is highly unlikely that your trade will be conducted at one of the two daily fixed rates. Trades will be conducted at the current market price whatever that may be. You will be subject to the bid-ask system of being quoted a price by your dealer. Also, you need to remember the London fix is generally a price that large institutions are conducting trades of large volumes of gold. Smaller retail-sized transactions could be subject to a wider bid-ask price spread.
This does not mean the fix is unimportant for individual buyers. It will help you to understand what it, and other market factors are, and this, in turn, will help you to choose a reputable gold dealer. Being an educated consumer with a good knowledge base of market influences will make it easier for you to navigate the ins and outs of trading precious metals. It will also provide the confidence to know who to feel comfortable doing business with.
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