The London gold fixing or gold fix is the procedure by which the price of gold is determined twice each business day on the London market by the five members of The London Gold Market Fixing Ltd, on the premises of N M Rothschild & Sons. It is designed to fix a price for settling contracts between members of the London bullion market, but informally the gold fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world's markets. The gold fix is conducted in United States dollars (US$), Pound sterling (GBP), and the euro (€) daily at 10.30am and 3pm, London time, via a dedicated telephone conference facility.
On 12 September 1919 at 11:00am the five principal gold bullion traders and refiners of the day performed the first gold fixing. The original members were N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price was determined to be four pounds 18 shillings and ninepence (GBP 4.18s.9d = 4.9375) per fine ounce (troy ounce). The New York gold price was US$19.39. The first few fixings were conducted by telephone until the members started meeting at the Rothschild offices in New Court, St Swithin's Lane.
Due to wartime emergencies and government controls, the London gold fixing was suspended between 1939 and 1954, when the London gold market was closed.
On 21 January 1980 the gold fixing reached the price of $850, a figure not overtaken until 3 January 2008 when a new record of $865.35 per troy ounce was set in the a.m. fixing. However, when indexed for inflation, the 1980 high corresponds to a price of $2,305.18 in 2011 dollars, thus the 1980 record still holds in real terms.
The fixing historically took place at the London offices of N M Rothschild & Sons in St Swithin's Lane, but since 5 May 2004 it takes place by a dedicated telephone conferencing system. Until 1968, the price was fixed only once a day, when a second fixing was introduced at 3 p.m. to coincide with the opening of the US markets, as the price of gold was no longer under control of the Bank of England, a result of the collapse of the London Gold Pool. In April 2004 N M Rothschild & Sons announced that it planned to withdraw from gold trading and from the London gold fixing. Barclays Capital took its place on 7 June 2004 and the chairmanship of the meeting, formerly held permanently by Rothschilds, now rotates annually.
The five participating banks are market makers. They may have gold orders on their own behalf (proprietary trading), their client's behalf (brokerage), or frequently some of each. Client orders will generally be limit orders. A buy limit order is executed unless the price is above a preset value. A sell limit order is executed unless the price is below a preset value.
The lead participant will begin the fixing process by proposing a price near the current gold spot price. The participants then simulate the result of trading at that price. First, each bank looks at its limit orders and determines how many are eligible to trade at that price. They can also consider how much gold their proprietary trading desk would trade at the same price. The bank then states a single value, the net amount (in ounces) of gold they wish to buy or sell. After each bank provides this value, they determine if the overall net amount is 0. If so, all transactions succeed and the fix is complete. The chair then states, "There are no flags, and we're fixed."
Otherwise, the chair must change the proposed price. If the amount of gold the banks proposed to buy is higher than the amount proposed for sale, he must raise the price. That will decrease the number of proposed purchases, both because more buy limit orders will fail and because of proprietary traders. At the same time, it increases the number of proposed sales, both because more sell limit orders succeed and because of proprietary trading.
Conversely, if the amount proposed for sale is higher, he must lower the price. This will have the exact opposite effects from above, increasing the number of proposed purchases and decreasing the number of proposed sales.
This process iterates until a fix is found. Buyers are charged 20 cents per troy ounce as a premium to fund the fix process; this results in an implicit bid-offer spread.
As with other forms of market making, participants attempt to predict the direction of the market and increase profits through timing.
Participants can pause proceedings at will. Originally, it was done by raising a small Union Flag on their desk. Under the telephone fixing system, participants can register a pause by saying the word "flag."
The current five participants in the fixing, who must be members of the London Bullion Market Association, are:
- Scotia-Mocatta — successor to Mocatta & Goldsmid and part of Bank of Nova Scotia
- Barclays Capital — Replaced N M Rothschild & Sons when they abdicated
- Deutsche Bank — Owner of Sharps Pixley, itself the merger of Sharps Wilkins with Pixley & Abell
- HSBC — Owner of Samuel Montagu & Co..
- Société Générale