Problems for Gold Traders with the Gold Fix
Are you interested in trading gold? As we explained in, “Getting Your Gold Fix—By Trading Gold,” twice a day, at 10 a.m. and 3 p.m. London time, five members of the London Bullion Market Association (LBMA) meet to set the benchmark price of gold, called the “gold fix.” Let’s talk more about what the gold fix means for gold traders.
Although this meeting is designed to set a price for contracts to buy and sell gold between members of the London bullion market, it also provides a recognized rate that is used as a benchmark for gold prices on other gold-trading markets around the world.
The gold fix is a good guide to the value of gold at one moment in time, and is designed to allow gold traders to trade gold at a fair price.
And, if you are a gold trader with enough money to be involved at the level of the gold fix, it can be efficient: Since there’s such a large pool of liquidity available at one time, as long as there is not excessively large demand or supply, the price should be fair.
The gold fix does create some problems for gold traders, however.
- First, it is only set twice a day, which can be a problem for gold traders who are trading gold on the world’s various markets all day long.
- Second, the cost of entering the market is high through the gold fix: Since physical delivery and storage of the gold has to be arranged, and can be costly, there is very little enthusiasm anywhere for small quantities, and the smallest trade size is somewhere around $500,000. Although a gold trader may be able to find an intermediary that will take a smaller order and aggregate it up with other orders from gold traders, the intermediary will likely charge you a fee for doing so, which can reduce your profits.
- More important, perhaps, is that there may be a conflict of interest in the gold fix. Let’s say you’re a gold trader and you want to buy gold, so you go to one of the LBMA members, a producer, involved in the gold fix. This member must acts in two roles: He must get a bargain price for your gold trade, but he also must get a high selling price for himself. And this is happening a lot, with many gold traders and dealers. Think about what happens if most customers are buyers, and a producer on the LBMA knows this it. It would benefit him not to declare as a seller until the price quoted by the chair has gone up a bit.
There are other options, however, which we will discuss in other articles.