The fix is in: has the gold market been rigged?

After the Libor and foreign exchange scandals, accusations of price manipulation in the precious metals market are gaining momentum. What are the investigations looking into the issue, and has the transition of price fixes for gold and other metals to electronic platforms closed the door to collusion in the future?


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Suspicion over potential price manipulation in gold and other precious metals markets has been widespread for years. The setting of the gold benchmark price (called the 'gold fix'), which is used by mining companies, traders and central banks to buy and sell gold and its derivatives, has until recently been carried out by a small group of banks, which carried out secretive twice-daily phone calls to set a reference price.

The argument made by disgruntled traders, hedge funds and individual investors over the years has been that traders with the banks involved in the gold fix - Barclays, HSBC, the Bank of Nova Scotia, Société Générale and, before it resigned its seat in April 2014, Deutsche Bank - have exploited the information revealed during the gold fix to manipulate the metal's price and strengthen their own positions, often at the expense of their clients.

Conspiracy theory to conspiracy fact

Up until relatively recently, these accusations have been dismissed as outlandish conspiracy theories, the province of paranoid bloggers and investors with an axe to grind. But in the last few years, investigations into the banking sector have revealed the truth behind a number of scandals that were similarly dismissed as hearsay.

After the extent of the Libor rate manipulation scandal became shockingly apparent in 2012, the door was left open for other major financial markets to be scrutinised more closely. The next domino to fall has been the foreign exchange market, with the revelation in November 2014 that after an 18-month investigation, regulators including the UK Financial Conduct Authority (FCA), the US's Commodity Futures Trading Commission (CFTC) and Swiss regulator Finma imposed total penalties of around $4.3bn on six major banks to settle accusations that traders had manipulated foreign exchange benchmarks.

"We now know that Libor was manipulated and that a bad odour is coming out of the forex market. So why not gold?"

Suddenly the idea of price manipulation of gold and other precious metals didn't sound so far out of the realms of possibility, and a flurry of investigations and lawsuits in the last year has lent credibility to the accusations.

"A lot of conspiracy theories have turned out to be conspiracy fact," said former gold trader Kevin Maher, the initiator of one such lawsuit, in an interview with the New York Times last year. "We now know that Libor was manipulated and that a bad odour is coming out of the forex [foreign exchange] market. So why not gold?"

Gold price manipulation: investigations and lawsuits

In fact, the conclusion of the foreign exchange investigations has only intensified the pressure to put precious metals traders under the spotlight. During Finma's probe of UBS's foreign exchange practices, the Swiss regulator discovered a striking similarity between the forex and precious metals trading desks.

"The behaviour patterns in precious metals were somewhat similar to the behaviour patterns in foreign exchange," said Finma CEO Mark Branson during a conference call in November. "We have also seen clear attempts to manipulate fixes in the precious metals markets."

Finma's discovery wasn't the first sign that the benchmark gold price has been extremely vulnerable to manipulation. In May 2014 the FCA fined Barclays nearly $44m after it was found that one of its precious metals traders, Daniel James Plunkett, had exploited Barclays' systems on 28 June 2012 to manipulate the 3pm gold fix downwards, thereby avoiding the need to pay out $3.9m to a customer on a derivatives contract. Plunkett himself was fined £95,600 and received a lifetime ban from any regulated role in financial services.

"A firm's lack of controls and a trader's disregard for a customer's interests have allowed the financial services industry's reputation to be sullied again," said FCA director of enforcement and financial crime Tracey McDermott. "We expect all firms to look hard at their reference rate and benchmark operations to ensure this type of behaviour isn't being replicated. Firms should be in no doubt that the spotlight will remain on wholesale conduct and we will hold them to account if they fail to meet our standards."



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In the US more recently, it was reported by the Wall Street Journal in February this year that the Department of Justice (DOJ) had launched an investigation into the manipulation of the price of gold and other precious metals, including silver, palladium and platinum. Alongside the DOJ's probe, the CFTC has begun a civil investigation, issuing a subpoena to HSBC Holdings for information relating to precious metals trading practices. These investigations are being carried out despite an earlier precious metals benchmark review by the FCA and German watchdog BaFin reportedly being closed after no evidence of wrongdoing was found.

The US investigations are still at an early stage and are unlikely to yield results for quite some time, but the move is still significant as a demonstration of the growing credibility of manipulation concerns in the precious metals market. Lawsuits such as the large group of suits filed in the Manhattan Federal District Court in May 2014 regarding gold price manipulation, which involved more than 20 plaintiffs, as well the class-action suit launched by jewellery company Modern Settings and other plaintiffs the following November, have added to the building momentum.

"The lack of prohibition against trading during the calls allows defendants to gain an unfair trading advantage because pricing information exchanged during the calls provides them with insight into the immediate future direction of gold and gold derivative prices," argued one of the suits filed in May.

Will electronic fixes solve the problem?

Since the regulatory and legal spotlight started shining on the precious metals market, a major change has occurred in the way the gold fix and other precious metal price fixes are carried out. Essentially, the traditional fixes for precious metals involving daily conference calls between bullion banks, some of which have run for more than a century, are no more.

The silver fix was transferred to an electronic auction-based platform in August last year, with the platinum and palladium price fix following suit in December. Finally, the gold fix was dropped and switched to a digital system, administered by the ICE Benchmark Administration for the London Bullion Market Association (LBMA) gold price, in March this year.

The move to electronic platforms is designed to do away with the previous fixing systems' vulnerability to collusion and manipulation. According to LBMA chief executive Ruth Crowell, this transition has made price fixes more transparent and accessible to a wider range of participants.

"[The transition to electronic platforms] has allowed for an increase in participation as well as the opportunity for interested parties to view the auction live globally, through various data providers, therefore improving transparency," wrote Crowell in a letter responding to the Bank of England's Fair & Effective Markets Review (FEMR).

"Currently, data on the amount of precious metals traded on the London market does not have to be made available."

Electronic price fixes have certainly helped address the widespread concerns about collusion under the traditional fixing method, although it's still too early to draw any definitive conclusion regarding the new system's manipulation-deterrence. Some have argued that the electronic fix is still open to abuse, as demonstrated by the US Securities and Exchange Commission's investigation into whether "stock exchanges provide advantages to certain clients, including high-frequency traders, by designing software programs that can give preferential treatment to their orders, and whether such details have been fully disclosed", as reported by the Wall Street Journal.

Currently, data on the amount of precious metals traded on the London market does not have to be made available due to the LBMA's status as an over-the-counter market. In her letter to the FEMR, Crowell noted that making more trading information public would also help to assuage fears: "The Review can assist in providing for further transparency, by encouraging the precious metals market to report anonymised unique transactional data, through mandatory reporting obligations and potential clearing."

While the precious metals markets look to be making some reassuring moves to make precious metal fixes more open and transparent, what about the various probes and lawsuits looking into past abuses of the old system? The DOJ and CFTC investigations are just ramping up, but the banks involved are likely to follow the familiar pattern of co-operation and advance settlements in cases where wrongdoing has been identified, as they have during the Libor and foreign exchange enquiries. As a result, there's little chance that evidence of large-scale institutional misconduct, rather than isolated 'rogue trader' incidents, will ever come to light.