Will China’s New Gold Fix Be a Game Changer?

On the morning of September 12, 1919, an important tradition in the gold market was launched. The five most prominent gold bullion traders and refiners; N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Sharps Wilkins and Samuel Montagu & Co., carried out the very first London gold fix. The idea behind this fix was to set a benchmark price that could serve internationally as the basis for buying and selling gold.

Remarkably enough, the tradition persisted as an in-face meeting between these five representatives at the London offices of N M Rothschild & Sons in St Swithin’s Lane.The price was fixed only once a day until 1968, when a second fix was added at 3 p.m. to accommodate the opening of the U.S. markets.  In 2004 Rothschild & Sons announced plans to discontinue gold trading, and Barclays Capital stepped in to replace them. By this time members had begun handling the gold fix through telephone conferencing instead of face-to-face meetings.

For all of its lack of automation and cozy subjectivity, the gold fix worked with surprising efficiency well into the twenty-first century. Then in 2012, a Barclays employee decided to manipulate the price-fixing process specifically to prevent one of his gold derivative clients from receiving a substantial payout. The employee and Barclays came clean on their own, and paid a substantial fine.  But it became clear the London fix needed fixing.

On March 20, 2015, the London Market Bullion Association (LBMA) launched its new LBMA Gold Price, replacing the London gold fix as the benchmark price.  This new fix would be administered by ICE Benchmark Administration (IBA). Instead of traders haggling back and forth by phone, working from market orders, the LBMA would establish the fix electronically twice daily through auction, and update it every thirty seconds.

Despite all its improvements, the gold fix is now about to encounter its biggest challenge since it first began ninety-seven years ago.  Because the global gold bullion market has more players, and because perhaps familiarity breeds cartel, London’s reign over the daily gold price is slipping.  China wants in.

As the world’s largest producer, consumer and importer of the yellow metal, China does not enjoy being dependent on the U.S. dollar for international gold transactions. And so it’s launched a benchmark based on its own currency, the yuan.

At least one observer, global markets expert James Rickards, thinks because the Chinese hold an enormous amount of U.S. debt in the form of treasury bonds, they fear we might try to inflate our way out of it.  As Rickards sees it, “China’s solution is to buy gold. If dollar inflation emerges, China’s Treasury holdings will devalue, but the dollar price of its gold will soar. A large gold reserve is a prudent diversification.”  So, from China’s perspective, the time is ripe for a competitive gold fix; one based on their currency rather than the U.S. dollar.

Now consider the implication of this change as you set out to build your wealth and protect your nest egg. If the world’s largest producer and consumer of gold, a nation also deeply enmeshed in the U.S. economy, is attempting to free itself from dollar dependency, how will that impact the value of the dollars you’ve saved? Although it’s been steadily moving up, gold’s price is still poised at an affordable, pre-breakout level.  Now is an opportune time to start preserving your wealth, and your retirement holdings, before that breakout occurs.