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Does the Gold Price reflect true gold Demand and Supply?

Despite the furore surrounding the Gold Fix [unfairly, we believe] it is a singularly determined attempt amongst commodities to set a twice daily price that does reflect demand and supply of gold, at those moments. To understand this we have to see what happens at the Fixing sessions.

The five banks involved in fixing the morning and afternoon Fix of the gold price open a conference line to each other at 10.30a.m. and at 3.00p.m. in the afternoon. At the same time each bank opens their lines to contact their main clients, who could include mining companies, refiners of gold, jewellers, gold dealers and all the main professionals in the gold market. In turn these professional open their lines to their main clients which could also include central banks as well as wealthy individuals and other gold markets. These then react to a price put up by the Chairman of the Fix, representing his bank. This price is sent down the lines and each participant states the amount they are net buyers or sellers of. Each bank ‘nets out’ the demand and supply among his own clients before passing on the net order to the Fixing. At each price, orders down the line change and the price adjusted accordingly. Once the market is agreed upon a particular price all transactions are done at that price.

Bulk of Gold contracted

However, the amounts dealt do not include all the gold bought and sold in the market at that time. Many dealers, miners and jewellers refer to the Fixing price of gold and contract to deal at a price that reflects, usually, the afternoon Fix. This is deemed to be the most reflective of global demand and supply, at that particular moment, in time. But the fact that amounts of gold are dealt outside the market, with reference to the Fixing price, tells us that much of the world’s gold and supply does not go through the London market. The claim that 90% of gold’s demand and supply goes through the London market is therefore conjecture, not fact. It is impossible to say just how much gold is priced by reference to this Fix and not dealt in the market place, but it is substantial.

Manipulated?

Charges that insider trading goes on in the Fixing, we believe are false. What does happen is that clients accessing the Fixing process then deal in the gold market on COMEX on the basis of the process. Add to this high frequency trading and you can see where the profit opportunities are. But we believe that few of these operators would risk dealing in physical gold in the Fixing, as that may work against them, increasing their risks. More profit lies in dealing in Futures and Options, on the side, we feel. What is transparent to all involved in the Fixing [who have an interest in that price] are online in the Fixing, so see a very transparent process going on in which they can partake. Those not involved but with a need to reference the price in their dealings, usually do not deal at the Fixing, but wait for the price to be Fixed before finalizing prices.

Conclusion

Hence the changing daily prices at the Fix, while not representing the total amount of gold bought and sold are the only reasonable reflection of the current gold price. We therefore expect that price to be treated as a reliable reflection of the current demand and supply of gold.

Source Gold Seek

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