Issue 17

The London Gold Fix

By Helen McCaffrey
Treasury Analyst, Rothschild & Sons Ltd

The outbreak of World War I resulted in most countries suspending gold payments, except for urgent settlements. The gold standard collapsed during the war as central banks started keeping reserves in currencies that could be exchanged for gold. With the war's end, South African mining companies sought a means of open marketing for their gold rather than dealing exclusively through the Bank of England's set sterling price. They approached NM Rothschild & Sons, instructing them to market the gold at the best price obtainable, giving the London market and the Bullion Brokers an opportunity to bid’. The first fix took place on 12 September 1919 at a price of £4.18.9d per ounce (in dollar terms, $20.67).

The five fixing members: Deutsche Bank AG / HSBC Bank plc / N M Rothschild & Sons Ltd Republic National Bank of New York / The Bank of Nova Scotia - ScotiaMocatto

Today the gold fixings take place at 10: 30 am and 3:00 pm at the premises of N M Rothschild & Sons Limited, the Chairman. In keeping with the principle of the original memo of 1919, all members of the fix participate on an equal basis. Market participants can buy or sell gold through the members at a single quoted price in the US Dollars. The fix provides a published price level, which is used as an official pricing medium by producers, consumers and central banks. It is the only market benchmark that can actually be dealt on. The narrow spread between bid and offer on the fix (25 cents) becomes even more attractive during times of market volatility when market spreads tend to widen.

Mechanics of the Fix

  • Each bank sends a representative who remains in telephone contact with his own dealing room throughout the fixing. The Chairman of the fixing, a representative of N M Rothschild & Sons Ltd (currently Neil Jackman), announces an opening price which is reported back to the dealing rooms of the five members. They in turn relay this figure to their customers and, on the basis of orders received, instruct their representative as to whether they are a buyer or a seller. Members are then asked to state the number of bars (of 400 ounces of gold each) which they wish to trade at that price.
  • If the number of bars bought and sold does not balance, the price is moved and the same procedure is repeated until a balance is achieved, at which time the Chairman declares the price as fixed. In normal market conditions, this takes about five minutes.
  • Customers may leave orders in advance of the findings. Alternatively, they may choose to be advised of the price changes throughout the fixing and may alter their orders accordingly at any time where the price is fixed. To ensure that any order change is communicated quickly to the Chairman, each representative has a small Union Jack 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.

Fix Chart Timeline

  1. 1933 - President Roosevelt bans US gold and forbids Americans to hold gold
  2. 1935 - fort Knox built to store gold flowing into US attracted by US $35 price
  3. 1944 - Bretton Woods agreement confirms US dollar exchange: standard creates IMF
  4. 1961 - International gold pool formed to 'hold' gold at US$35 an ounce.
  5. 1968 - Collapse of the gold pool. On 15th March 1968, the authorities dosed the London gold market for two weeks following an unprecedented three-day speculative surge of buying. On 1st April 1968, the primary fixing changed from sterling to dollars and took place twice a day.
  6. 1972 - Federal Reserve closes gold 'window' ending gold exchange standard.
  7. 1974 - Gold hits high, of US$197. 50 in anticipation of Americans being allowed to buy gold.
  8. 1975 - US Treasury starts gold auctions.
  9. 1976 - IMF begins four-year gold sales programme.
  10. 1980 - on 21st January gold hits record US$850. Combination of the political crisis in the Middle East, high oil prices and inflation prompts strong physical and speculative buying.
  11. 1985 – Gold hits low of US$284.25
  12. 1986 -Japan buys 323 tonnes for Hirohito coin.
  13. 1987 - Black Monday stock market crash.
  14. 1990 - Large Soviet 'distress' sale in May. Iraq invades Kuwait in August.
  15. 1991 - Desert Storm starts, but gold price collapses.
  16. 1992 - Highest level central bank gold sales since 1968.
  17. 1993 - Sows and Goldsmith gold deal sparks fund buying.
  18. 1996 - US Federal Reserve Chairman Greenspan warns of 'irrational exuberance' in US stock markets.
    - IMG proposes to sell a proportion of its gold reserves of fund debt relief.
    - Investment interest together with reduction in producer hedge positions pushes gold to a high of US$414.80.
  19. 1997 - Reserve Bank of Australia announces sale of 167 tonnes.
    - Group of Swiss experts recommend sale of 1,400 tonnes of Swiss National Bank Gold.
  20. 1998 - Belgian National Bank announces sale of 299 tonnes of gold to other central banks.
  21. 1999 - UK Treasury announces sale of 415 tonnes of gold. - On 20th July the gold price fixes (PM) at a 21-year low of US$252.80.