The "Real Story on the "Price Fixing of Gold" continues....

At the start of each fixing, the Chairman (who has been a representative of N M Rothschild & Sons Ltd since the inception of the Fix), announces an opening price to the other 4 members, who report that price back to their dealing rooms. They in turn relay this price to their customers, and based on orders received from them, instruct their representatives to declare themselves as buyers or sellers at the at price. Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade.

If at the opening price there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The Chairman then announces that the price is fixed. It should be noted that the Fix is said to balance if the buy amount and the sell amount are within 25 bars of each other. 

  Alternatively, they may choose to be kept advised of price changes throughout the Fixing and may alter their orders accordingly at any time until the price is fixed. To ensure that any order change is communicated quickly to the Chairman, each representative has a small flag on his desk, which he raises immediately upon hearing of the change from his dealing room. As long as any flag is raised, the Chairman may not declare the price fixed.

London’s deserved reputation as the world’s leading international bullion trading centre has its basis in history. The origins of the emergence of London as a gold trading centre can be traced back to around 1671 when the young Moses Mocatta crossed the North Sea from Amsterdam (where he had been trading in sugar and diamonds) to set up business as a merchant, opening an account with Alderman Edward Backwell. Initially his main business was in diamonds, but records from the East India Company in February 1676 show ‘By cash of Moses Mocatta for freight on 75 ounces of gold on their ships "Nathaniel" and "Society" - £6’. This gold was used to pay for diamonds, and shipments of gold and silver into London soon became regular events.When Napoleon escaped from Elba in 1815 and returned to France to raise his army, the price of gold in the London market jumped overnight from £4.6.6d an ounce to £5.7.0d. Nathan Mayer Rothschild had been ordered by the British Treasury to buy gold to fund the Duke of Wellington’s troops in the Battle of Waterloo. At the end of the Napoleonic wars, Britain adopted a formal gold standard (although an unofficial gold standard had been operating since 1717). The rest of Europe remained on the silver standard until increasing supplies of gold, first from Brazil in the eighteenth century, then from Russia, California, Australia and South Africa in the nineteenth century, made it possible for the rest of Europe to switch to the gold standard.

The threat of WWI resulted in most countries suspending gold payments, except for urgent settlements, and the gold standard collapsed as central banks started keeping reserves in currencies that could be exchanged for gold. As the war ended, a crucial step was to restore London as the market place for gold. Initially the Bank of England had an agreement with South African mining finance houses for them to ship their gold to London for refining, after which it would be sold through N M Rothschild ‘at best price obtainable, giving the London market and the Bullion Brokers an opportunity to bid’.

Post WWI

Thus on 12^th September 1919 at 11.00 a.m., the first gold fixing took place, when the price of gold was fixed at £4.18s.9d. per fine ounce. The higher price that day reflected the sterling/dollar exchange rate in New York. The New York gold price was $20.67 per ounce. The bids were made by telephone for the first few days, but it was then decided to hold a formal meeting at the Rothschild offices in New Court, St Swithin's Lane.

Although the London fix continued to be in sterling for almost another 50 years, what really counted was the dollar price of gold, as the dollar gradually replaced sterling as the world’s favourite reserve currency. Britain made a partial return to the gold standard in 1925, however, on 21 September 1931, the gold standard was suspended. Over 200 years of a stable gold price, save for short interludes in the Napoleonic Wars and WWI, had ended. In addition, the reputation of sterling, backed by gold as the international currency was over, sterling was devalued. 

The US remained on the gold standard, with the price fixed at $20.67 until 1933, when Roosevelt not only banned the export of gold and halted convertibility of dollars into gold, but also ordered US citizens to hand in all the gold they possessed (the prohibition on gold lasted until 31 December 1974). Roosevelt, who was trying to boost the US economy, was concerned that the accompanying inflation would weaken the dollar and lead to an outflow of gold. Roosevelt took to deciding the gold price himself. On the 31^st January 1934, the gold price was raised to $35 an ounce (a total devaluation of the dollar of almost 40%) and the US resumed the gold standard.

The fixing thrived until the outbreak of WWII on 3^rd September 1939, when the London gold market closed. No fixings were held for almost 15 years, until 22nd March 1954, when the London market was permitted to resume the fixing. The final fixing before World War II had been at a price of £8.1s.0d an ounce, almost double that of 1931. On the 22nd March 1954 gold fixed at £12.8s.6d, the increase from the last pre-war fix was due to the devaluation of sterling. Although the fix was still in sterling, the main concern of the BoE was to keep it in line with the equivalent of $35.

The task of keeping the sterling price in line with $35 became increasingly difficult, as the private market for gold grew. As early as 1961, the BoE found it had to sell occasionally from reserves on the fix to hold the price at $35. This lead to the creation of the gold pool – an alliance between central banks around the world to maintain the $35 level. The pool worked well until 1965, when private buying of gold begun to exceed mine supply, forcing central banks to sell gold reserves into the market to hold the price steady. In 1968, when the Tet offensive in Vietnam touched off a tidal wave of buying, the pool lost 3,000 tonnes trying to hold the price down.

Post 1968

On the 15^th March 1968, the authorities closed the London gold market for two weeks, following an unprecedented three-day speculative surge of gold buying. When the London gold market re-opened on the 1^st of April 1968, it fixed the price in dollars not sterling, with the gold price no longer set, but free to float and with prices set twice a day, both in the morning and afternoon.

Over the course of more than 80 years of the gold fixing, the highest fix was US$850 per ounce on the 21^st of January 1980, amid the political crisis in the Middle East, high oil prices and inflation. The longest fixing lasted for 2 hours and fifteen minutes when the stock markets crashed on Black Monday in late October 1987. The highest turnover occurred in March 1968 just before the gold pool collapsed - 14,180 400oz London Good Delivery bars were traded.

 Extracts from "The World of Gold" by Timothy Green