The Commodity Investor: Nontransparent London Gold Fix Has To End

July 31, 2014

The market needs to do away with the antiquated gold-fixing process.


The electronic area has indelibly transformed the precious metals market and industry. Beginning in the year 2000, the convergence of technology and these old-world metals created an explosion in demand and trading activity that these metals hadn’t experienced in the previous 2000 years. Indeed, the way precious metals are traded (including silver and gold) were forever transformed by two technological developments: online trading and ETFs.

Technological Revolution & Financial Innovation

Prior to the advent of the Internet, the trading of silver and gold (and most other commodities) was conducted on exchanges such as the London Metals Exchange (LME) or the New York Board of Trade (NYBOT) by floor traders who literally shouted with each other in order to place trades.

With the advent of the Internet, anybody with a computer connection could bypass the floor brokers and place trades themselves, through an online trading platform, without having to leave their home or office. This technological development helped bring millions of new traders into the markets, and was responsible for the explosion in trading volumes we’ve seen ever since.

In conjunction with this profoundly disruptive technological development, financial innovation accelerated this trend and helped deepen the precious metals markets, bringing even more participants into the industry.

The creation and dissemination of financial instruments such as the exchange-traded fund (ETF), the exchange-traded note (ETN) and other tools gave us the ability to easily and quickly trade these markets in ways that were inaccessible to average traders in the 1990s.

However, as financial innovation and technological acceleration helped propel these markets into the 21st century, 20th-century methods of doing business still prevailed. Specifically, the ways in which gold and silver benchmarks are calculated are relics of a past that new traders who haven’t experienced the 1980s and 1990s (let alone the 1970s) will not and do not recognize. The traditional benchmark-setting mechanisms used in gold and silver markets are now changing, and this will have a profound impact on the markets going forward.

In this column, we will look at the price benchmarks that are established in the gold and silver markets, how these benchmarks are changing and what traders can do to adapt to this new reality.


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