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Bullion uncovered: Why the way gold pricing works is open to manipulation

by , 27 June 2014

At the end of May, Barclays received a fine for $43.8 million by a British financial regulator. This was down to its part in a gold price fix incident in 2012. This incident brought to light the issues with the way gold pricing works. Let's take a closer look at what went on and what it means for the gold price…

The way the gold price fix works was itself fixed

The incident at Barclays was down to the actions of one trader, Daniel Plunkett. He eluded Barclays’ internal controls to fix the gold price so that the bank didn’t have to pay a large pay out, David Zeiler in Money Morning US explains.

Had the gold price risen to $1,558.96 and closed at that level, Barclays were liable to pay $3.9 million to one customer who bet the price would rise.

The only reason this trader got away with this astonishing act was due to Barclays being part of the twice-daily gold price fix. The benchmark price for gold isn’t determined by trading like in other markets, but by four banks.

The four banks are HSBC, Societe Generale SA, Bank of Nova Scotia and Barclays. Up until April, Deutsche Bank was also a member, but it resigned.

How the gold price fix works

During the course of two conference calls, one in the morning and one in the afternoon, the gold price is set.

This practice began in 1919. The purpose behind it was to allow gold miners, jewellers, central banks and commercial banks to buy gold at a single price.

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But the practice also resulted in a trader abusing the system and help Barclays avoid paying out on a trade.

So there you have it, why the way gold pricing works is open to manipulation.

Bullion uncovered: Why the way gold pricing works is open to manipulation
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