Intercontinental Exchange or ICE has announced two more members of the newly implemented gold benchmark this week. Morgan Stanley and Standard Chartered are just the latest two banks to join the twice daily electronic-based auction system for setting the gold price. More are expected to join in the coming weeks.
Standard Chartered, based in the UK, was already a market member of the London Bullion Market Association but now will have direct influence over the actual price setting.
Also known as the “Gold Fix”, the benchmark occurs twice per day at 10:30am and 3:00pm UK time. The purpose of the price-setting is to better facilitate transactions of gold by setting an agreed-upon international price for trading.
It has been taking place twice per day since 1919, and initially it was conducted in person, in the offices of N.M. Rothschild and Sons. Later, the system was switched over to a secure telephone call to better facilitate international participants.
With such clandestine arrangements, naturally, the benchmark has been the subject of much criticism and conspiracy theories over the past 95 years. It was only recently that enough evidence emerged to finally confirm the suspicions of manipulation.
Multiple lawsuits were filed in New York City after it was uncovered that at least 10 major banks were rigging prices and colluding to manipulate the trading value of gold.
This led to an industry-wide call for greater transparency in the process which required a new administrator and auction system to be put in place to ensure that the agreements would be compliant. Several companies bid on administrator duties, but Intercontinental Exchange eventually won the honor. The new system began this past March and ICE has been gradually adding participants ever since. Just last week, they announced that the first Asian bank, the Bank of China (BoC), would be the newest bidder. China Construction Bank is expected to also join in the near future.
China has long desired to be included in the price-setting and these two new Asian bank participants will give the country much more control over the value of their growing gold hoard. Soon, the country may end up holding more influence over the pricing than anyone else. China recently announced it was in the early stages of launching its own gold benchmark process.
While two competing benchmarks seems like it could create confusion among precious metals traders, China could have larger plans in store for the future of gold pricing.
This year the country is making an aggressive play to have the Renminbi included in the Special Drawing Rights reserve currency. As a result, they are having to improve the transparency of their once-secretive banking practices and it may lead the country to reveal the true amount of their massive gold accumulation in recent years. That’s because inclusion in the SDR will also require China to abandon the Renminbi’s peg to the U.S. dollar to let it float to its true market value. This has many believing that the country will reveal their gold holdings in order to help stabilize the price of the RMB during this transition period. Some think the country could even decide to fully back the currency with gold. While that is unlikely, any major moves by China with regard to their gold reserves will certainly have an impact on the price.
If China has effectively cornered the market while establishing its own benchmark process, it could make the ICE Benchmark completely obsolete. Precious metals analysts have theorized for years that the price of gold has been artificially suppressed. Combined with the fact that China has been deliberately obscuring their gold purchases via proxy banks and the acquisition of entire mining companies in Africa, gold could find its true market value very soon.