TCH: The Daily London Gold Fix

???????????For well over a century, London was the center of the world’s gold trade despite being near no major sources of the metal nor a particularly large consumer of it. It was, however, the capital of an empire that spanned many of the gold producing regions of the world and the city was home to refineries that could process the precious metal and banks and brokers that could sell it. For over one hundred years now, some of the most important banks and brokers in the gold trade have gathered every day to set a benchmark price for the metal, a recurring event known as the ‘London Gold Fix’.

London Gold Market

???????????In 1717, the physicist Sir Isaac Newton was serving as Master of the Royal Mint. In that post, he fixed the price of gold relative to the pound sterling at 3 pounds, 17 shillings, and 10.5 pence per ounce, a price for gold which would more-or-less hold for the subsequent two centuries. The Bank of England initially took the lead role in organizing the gold market in Britain. In 1750, the Bank approved a ‘List of Acceptable Melters and Assayers’, a selection of refineries approved to deliver standardized gold bars for the London gold market. The list survives to this day, though it is now known as the ‘Good Delivery List’ managed by the London Bullion Market Association.

???????????When the Bank of England began to take a less sweeping and direct role in organizing the market, five private banks and bullion brokers took over management of the ‘List of Acceptable Melters and Assayers’. The five were N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co., and Sharps Wilkins. So crucial was this set that the very term ‘London Gold Market’ came to be used to collectively refer to these five specific firms either alone or perhaps together with the Bank of England which had previously controlled the market by itself.

???????????In any case, at the start of the 20th century, the group may as well have been called the ‘World Gold Market’ since London was its most important center. The city was the ultimate destination for unrefined gold from British dominions, which included more than its fair share of the largest gold producers in the world, namely South Africa, Canada, Australia, Rhodesia, and India. Many of these countries lacked domestic refining capacity so it was in London where their gold would be refined and sold to interested buyers.

London Gold Fix

???????????On September 12, 1919, the prominent five gold firms participated in the first formal ‘gold fixing’ after the First World War had interrupted the market. At this ‘fixing’, which would be repeated each day, the five firms would arrive at a price for gold that would serve as a global benchmark. The return to a smoothly functioning market for gold was seen as critical to keeping London at the center of the bullion trade. The London industry was weary of the growing importance of New York. The Bank of England helped re-establish the gold fixing, giving a larger role for N M Rothschild, which had the strongest relations with the major South African producers of the metal.

???????????The gold fixing was essentially an auction and the first few were conducted by telephone; though, after a few days, the auction switched to an in-person process. While held in private, the auction resulted in the publishing of a benchmark price that could serve as a world reference; sellers and buyers could now ensure they were receiving a fair price for their metal. The Bank of England hoped this transparency would reduce transaction costs, namely the bid-ask or ‘dealing’ spread between the price at which one could sell gold and the higher price required to buy it.

???????????At 11am each day, participants would gather at the offices of N M Rothschild & Sons on St Swithin’s Lane in London, close to the headquarters of the Bank of England. Here they would price the impressive quantities of gold arriving in Britain, largely from South Africa. As the leading firm and agent to many gold mining companies, N M Rothschild would advance ￡3, 17 shillings, 9 pence (￡3.17s.9d.) an ounce to the producers and would then auction off the gold, with any premium paid by auction buyers being accumulated and disbursed to the producers every six months. The first formal ‘fixing’ on September 12, 1919 achieved a price of ￡4.18s.9d., a substantial premium to the guaranteed price and a reflection of the pound’s continued weakness after the war. Britain’s brief post-war return to the gold standard was still years away.

Operations

???????????At each fixing, an opening price was announced by the chairman and this would be reported back to each firm and its clients by the companies' representatives at the auction. Typically, the firms would have accumulated orders from their clients to buy and sell gold for delivery in London in advance of the fixing. They would then announce the difference between these amounts at the auction. For example, if a firm had more buy orders than sell orders at the opening price then it would be a net buyer on behalf of its clients.

???????????The goal was to find enough net demand to offload the most recent deliveries of gold from South Africa or elsewhere. At some point in the 1930s, the practice evolved to make use of small Union Jack flags at each participating firm’s desk on the auction floor. While a firm was engaged in the process of receiving orders, its flag would be raised, indicating it was not ready to proceed; only once all the participants’ flags were lowered could the London Gold Market be ready to settle and the benchmark price set.

???????????If all flags were lowered and, collectively among the firms represented in the room, there was a balance of bids and offers, then the price would be set. If there was no such balance, then the process would be repeated at a higher or lower price, as needed, until the price for that day was arrived at. The fixing would usually take just a few minutes but one of the longest, in 1986, took two hours and fifteen minutes to complete.

???????????Sometimes, as much as 90% of a day’s trading volume in gold would be transacted at the fixing but on other occasions this amount would be as little as 10% as firms sometimes preferred to see how the price would migrate after the auction concluded. New supply or demand could always materialize outside of the auction.

History

???????????After the interwar years, the daily fixings ceased immediately after the start of the Second World War in Europe and would not recommence until 1954. During the war, the international gold trade shifted to secondary markets, like Switzerland or even in the likes of Beirut and Tangier. The final price recorded in September 1939 was ￡8.1s.0d and the first one recorded fifteen years later was ￡12.8s.6d. This 54% increase reflected the devaluation of the British pound over the period.

???????????During the 1960s, pressure on the U.S. dollar and sterling relative to gold caused prices for the latter to drift higher. The Bank of England, together with other central banks, became net sellers of gold to reduce or reverse appreciation of the metal when its price rose above acceptable levels, the last vestiges of the gold standard still existed even then. The market closed again in 1968 when the Bank of England was unable to sufficiently intervene to keep the gold price down.

???????????When the London Gold Market reopened, it did so in different form. Fixings were now held twice daily, at 10:30am and 3pm, with the latter added to make the auction more accessible to New York firms. Reflecting the change underway, the price was now to be fixed in terms of dollars and not in pounds. When the ‘Nixon Shock’ of 1971 brought an end to what little remained of the gold standard, the price of gold was allowed to float with less government and central bank intervention. The price surged higher, from the old official price of $35 an ounce to $195 an ounce by the end of 1974 and $850 an ounce by January 1980.

Participants

???????????Of the participants in the London Gold Market, the most famous is undoubtedly N M Rothschild & Sons. Though not what the firm was most well-known for, N M Rothschild had been dealing in gold since the Napoleonic Wars. The bank had replenished the Bank of England’s own reserves during a bank run in 1825. N M Rothschild & Sons operated a gold refinery themselves, leasing the Royal Mint Refinery in 1852. This refinery processed a large share of all the unrefined gold arriving in Britain; it refined 6.1 million ounces in 1913 alone.

???????????N M Rothschild acted as a London agent for South African mining companies and this helps explain why the firm was chosen by the Bank of England to act as chairman of the London Gold Market, a position it held for most of the market’s history. The company would have the most to gain by ensuring the South African firms found sufficient buyers at fair prices in London, rather than causing them to turn to New York or other aspiring markets elsewhere. In any case, after eighty-five years at the center of the London Gold Market, N M Rothschild chose to leave the commodities trading business in 2004; its seat at the fixings was taken over by Barclays.

???????????N M Rothschild was not the only illustrious firm among the five that comprised the early membership of the London Gold Market. Mocatta & Goldsmid was a very well-known bullion broker and a firm older than N M Rothschild; Mocatta was founded in 1684, a decade before even the Bank of England. Like Mocatta & Goldsmid, the firms Pixley & Abell, Samuel Montagu & Co., and Sharps Wilkins were also founded as simple bullion brokers, though Samuel Montagu & Co. would eventually join N M Rothschild as a bank when it launched its own merchant banking business.

Today

???????????In the 1980s, the Bank of England sought to create a new independent body to take over some of the responsibilities of the London Gold Market. The result was the 1987 creation of the London Bullion Market Association which took a lead role in regulating the industry. In May 2004, the last gold fixing held in the N M Rothschild offices took place and the auction was subsequently moved into the digital realm. Today, the composition of the market is very different; many more firms from all over the world, including more banks, participate in the still twice daily auctions.

Lesson

???????????Though London is no longer the center of an empire controlling the world’s greatest gold mines, though much of the world’s gold is refined elsewhere, and though global trade in the precious metal is more distributed, the city remains the home of key institutions in the world bullion trade. The more things change the more they seem to stay the same, or at least the more surprising that continuity becomes.

???????????This continuity is perhaps best embodied in the daily ritual that is the London Gold Fix. The market for gold looks nothing like it did in the days of the gold standard. Yet, as eventful as the past century has been in the history of gold, the London Gold Fix has not only operated through this transformative period but seems to have retained, at least through the end of the 20th century, much of its basic mechanics.

More from the Tontine Coffee-House

???????????Hardly the domain of individual prospectors, read about the industrial nature of South Africa's gold rush. After the Panic of 1893, the gold standard became the defining issue in an American presidential election. Also, consider subscribing to this blog’s newsletter?here.

Further Reading

1.??????Bytheway, Simon James, and Mark Metzler.?Central Banks and Gold: How Tokyo, London, and New York Shaped the Modern World. Cornell University Press, 2016.

2.??????Harvey, Rachel. “The Early Development of the London Gold Fixing.”?Alchemist, no. 65, 2012, pp. 3–6.

3.??????“History of the Gold Price Fixing.”?RothschildArchive.org, The Rothschild Archive.

4.??????“The London Gold Market.”?Bank of England Quarterly Bulletin, Mar. 1964.