The Gold Fix is In

Yesterday we mentioned that a big move lay ahead for gold — either up or down. It didn’t come overnight though. With the US equity market closed for Memorial Day, there wasn’t a lot happening in the gold sector. We watch and wait…

Whether it’s by coincidence or not, we don’t know, but gold has been very quiet ever since Deutsche Bank dumped its seat on the London gold fixing panel in late April. For some time before that regulators were sniffing around the London gold ‘fix’…and something didn’t smell quite right.

The London gold fix is a process by which five investment banks set (errr…fix) the price of gold on a twice daily basis in London. It’s been going on like that since 1919 when NM Rothschild controlled the process.

But in January, Deutsche Bank announced that it would relinquish its gold fixing seat (under pressure from the German financial regulator). It hoped to sell its seat to another player, but curiously no one was interested. As a result, it resigned the seat in late April, giving two weeks’ notice.

At the same time, Deutsche resigned from the silver fix. Because the daily silver fix only had three participants, this move effectively killed the price setting process. The silver fix, which began in 1897, will cease in August this year.

So here we have a major player getting out of a supposedly venerable position very quickly. Then, just a few weeks later, the UK’s Financial Services Authority (FSA) fines Barclays Bank £26 million for manipulating the gold fixing process. Of course this was just an isolated incident, and the FSA also fined a Barclays ‘rogue trader’ £96,000 pounds for doing the manipulating. It’s not as if it’s systemic or anything…

Maybe that’s why the gold price has been remarkably quiet these past few weeks. The fixers know the regulators are watching. Everyone’s behaving. But it’s not going to stay like that for long…

The fining of Barclay’s for manipulating the gold fix highlights what a degenerate racket the whole financial system has become. It’s a great business model for banks and governments. Here’s how it works:

Governments and central banks ensure a constant policy of inflationism and easy money…money that flows to the large banks before it gets to anyone else in the economy. This torrent of cash is sure to corrupt the most upstanding citizen, because when it comes to money, you can always have more, right?

It goes without saying then that in such a system, you’re going to have errors of judgment, oversight, and outright deception and corruption. But do the regulators actually try to stop it? No, they just impose fines to get their cut too. Fines don’t discourage bad behaviour; they are just a cost of doing business.

In 2013 the FSA brought in nearly £500 million…so far this year its take is £141 million.

According to analysis by the Financial Times, global investment banks have paid US$100 billion in US legal settlements since the financial crisis in 2008. Yet no senior executives of any bank have had criminal charges laid against them.

Our high school economics teacher once said: ‘Boys, if you’re thinking of going into the crime business, stick to the white collar stuff. They go easy on you.’ He was spot on…more so than he would’ve thought at the time.

The regulators are not interested in criminal charges. They are not interested in deterring such behaviour. They are interested in taking a cut and allowing the game to proceed. It’s a dirty racket and you’re paying for it.

Take a look at Barclays’ track record. The recent fine for gold fixing related to a period back in 2012, which came just days after the bank copped a record fine for manipulating the ‘Libor’ interest rate. Now, senior executives are under a probe by the UK’s Serious Fraud Office for dodgy dealings in Qatar during 2008. How’s the ‘culture’ at Barclays!

Don’t expect any of this to stop. It’s what happens in the latter stages of degenerate capitalism. Critics are quick to point out that capitalism is the problem. It’s not. The chief problem is the constant manipulation of the rate of interest. By holding interest rates for a prolonged period below the ‘natural rate’ (the free market rate where the needs of savers and investors are balanced out) you create distortions on such a grand scale there is practically no fix apart from a system bust up.

In the meantime, bankers behaving badly, and regulators taxing this behaviour (but not discouraging it) will continue. It will lead to greater resentment and class warfare. The likes of Thomas Piketty and his Marxist schemes of wealth re-distribution will gain traction, and real wealth will diminish further as the genuine producers are taxed out of existence.

Getting back to the gold fix, you could well be seeing the beginning of an end of an era in London. The Financial Review reports today that:

China has approached foreign banks and gold producers to participate in a global gold exchange in Shanghai, people familiar with the matter said, as the world’s top producer and importer of the metal seeks greater influence over pricing.

The Shanghai Gold Exchange (SGE) got the go ahead from the central bank last week to launch a global trading platform in the city’s pilot free trade zone, a move that could challenge the dominance of New York and London in gold trade and pricing.

That’s a big call, and it will take some time. But if China can demonstrate a more transparent pricing process than London, it’s on its way to usurping it as a major gold trading hub. The other major challenge for China is protecting private property rights. Large holders of gold (think the Saudis) are happy leaving their gold in London because the UK is secure (it’s an island and difficult to invade) and they know authorities won’t confiscate their gold. It has a long history of protecting private property.

Would the Saudis feel as safe leaving their gold on the Chinese mainland? Not right now. But China can chip away at the UK’s competitive advantage by enacting property rights laws and upholding them in all circumstances.

At the very least, China wants to develop an Asian trading hub for the precious metal as well as other commodities that it’s a large consumer of. Wresting part of that role from London should improve pricing transparency and business. When it comes to trading hubs, liquidity begets liquidity and it could soon dominate the market, leaving London to become a deep storage unit for gold…not a very lucrative business.

Speaking of China, it still has a property bust to deal with. The Wall Street Journal reports that real estate tycoon Pan Shiyi likens the market to the Titanic heading towards an iceberg:

“I think China’s property market is like the Titanic and it will soon hit an iceberg in front of it,” Mr. Pan told a financial forum on Friday, according to the China Business News.

“After hitting the iceberg, the risks will not only be in the real estate sector. The bigger risk will be in the financial sector,” he added.

He said serious problems lie with financial products like trust and wealth management products, as well as entrusted loans that charge higher interest rates than banks and are key financing vehicles for the property sector.

“When housing prices fall 20% to 30%, these problems will be all exposed,” he was quoted as saying.

Soho China declined to comment about Mr. Pan’s remarks. But in a post on his verified Weibo account Monday, Mr. Pan said that during the forum’s question and answer session, he had first asked whether there were any journalists present before replying to a question about the housing market. Only upon being told there were no reporters present, he said, did he proceed to answer.

Makes you feel pretty confident about the news you read in the mainstream media, doesn’t it? Now that it’s out in the open, we suggest you use any rally in iron ore over the next few weeks to lighten your holdings…

Until tomorrow…


Greg Canavan+
for The Markets and Money Australia

Join Markets and Money on Google+

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money