The London Gold Fix Was Set by Phone Call for a Century
Five firms agreed the gold price twice daily by telephone from 1919 until reform in 2015. The mechanism was transparent about its own opacity, which is a strange thing to survive so long.
The Mechanism
From 1919, the London gold price was established twice daily by a small group of member firms. A chairman proposed a price, members reported buying and selling interest at that level, and the price was adjusted until the two sides balanced.
The process was conducted by telephone, and the resulting price became the global benchmark referenced in contracts, used for valuing holdings, and applied to physical transactions worldwide.
What Made It Problematic
The mechanism itself is a reasonable way to find a clearing price. An auction that adjusts until supply meets demand is sound in principle.
The difficulty was who could see the process. Participating firms observed order flow accumulating during the call, meaning they knew how much buying and selling interest existed at each level before the price was fixed.
Knowing the size and direction of imbalanced orders before a price is set is precisely the information required to trade profitably against it.
The Reform
Following the Libor and foreign exchange investigations, benchmark setting processes across markets received scrutiny.
The gold benchmark was reformed in 2015, replaced with an electronic auction operated by an independent administrator, with a wider range of participants, published results, and regulatory oversight. Similar reforms applied to silver and to platinum group metals.
The substantive changes were transparency of the process, breadth of participation, and independent administration rather than operation by the firms trading in it.
The Pattern Across Benchmarks
Placing this alongside Libor and the foreign exchange fix reveals a consistent structure.
Each benchmark was established when markets were smaller and participants fewer, in an era when a process based on trust among a small group was workable. Each was operated by parties with trading interests in the outcome. Each lacked independent verification. And each survived long after the market had grown to a scale where the arrangement was inappropriate.
The common failure was not that these mechanisms were designed badly for their time. It was that they were not revisited as the markets they served grew by orders of magnitude.
The Question to Carry Forward
The practical habit is to ask of any reference price how it is produced, who produces it, whether they have positions affected by it, and what independently verifies it.
The answers are frequently unsatisfying for valuations of illiquid assets, for indices in smaller markets, and for prices in over the counter markets where no exchange publishes trades.
Wherever a price is produced by interested parties without verification, the structure that permitted these episodes is present regardless of whether anyone is currently exploiting it.
The Bottom Line
The gold fix let participants see order flow before setting the price the world used. Benchmarks operated by parties who trade on them carry the conflict by construction, and the fix is independence rather than good intentions.