History of the Gold Price Fixing
Origins of the 'London Gold Market'
The first gold rush of 1697 brought gold from Brazil into London, partly transported on ships owned by the East India Company. This inflow of gold led to demand for a purpose-built London vault, which the Bank of England established. The Bank of England played a key role in being a custodian, regulator and facilitator of lending and selling of gold by other banks. In 1750 the Bank of England set up the London Good Delivery List, which formally recognised those refineries who produced gold bars of a certain standard and could therefore be allowed to enter the London market. Refineries that were set up to process gold (including the Rothschild's own Royal Mint Refinery, established in 1852) were located close to the Bank of England.
By 1850, the five companies - N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins - that 150 years later would form the London Gold Market Fixing Company, were already established and flourishing. The term 'London Gold Market' refers to these five companies who came together to oversee the operation of the gold market in London. In 1919, it set up the first Gold Price fixing at the offices of N M Rothschild & Sons at New Court. The London Gold Market was also responsible for Good Delivery accreditations and the maintenance of the resulting List of Acceptable Melters and Assayers, as the List was originally known. The Market's five members remained essentially unchanged for most of its history. But by the 1980s the development of the market was such that the Bank of England recognised that the custody, maintenance and regulation of the Good Delivery List required an independent body. This was the catalyst for the founding of the London Bullion Market Association in 1987.
The first Fixing
For more than 80 years, the offices of N M Rothschild & Sons Limited in St Swithin’s Lane, close to the Bank of England, provided the setting for a twice daily ritual which, though conducted behind closed doors in a small room and with few players, had an impact across the world: the Gold Fixing. The daily Gold Fixing emerged in the wake of the First World War as a means of restoring systematic valuation to the gold market after the uncertainties of the wartime years. At the beginning of the War, many countries had suspended gold payments and the Gold Standard collapsed as central banks began to switch their reserves into currencies that could be exchanged for gold. As the War ended, the restoration of London to its pre-War position as the international market place for gold was seen as crucial to the City. The South African mining companies, whose output amounted to three quarters of the western world’s gold, and who had channelled their gold to the Bank of England for Britain’s reserves during the War, now sought an agency to market their output. The Bank of England entered into an agreement with the South African mining finance houses for them to ship gold to London for refining, prior to being sold through N M Rothschild “at the best price obtainable, giving the London market and bullion brokers a chance to bid.”
The choice of N M Rothschild to host this operation reflected a century of close association in bullion matters between the bank and its near neighbour, the Bank of England. NMR had been dealing in bullion with Threadneedle Street since 1824, its founder Nathan Rothschild and his brothers having already established an international reputation for their bullion and specie operations during the Napoleonic War. In 1825 the Rothschild brothers had undertaken a major operation to shore up the Bank’s bullion reserves during a potentially catastrophic run on the Bank. From 1840, they had acted formally as one of the Bank of England’s bullion brokers and their involvement in the refining process, which began with the leasing of the Royal Mint Refinery in 1852, strengthened this position. In 1919 Rothschild was in a pivotal position – both as a major refiner and an agent for the South African gold producers.
The system arrived at was for NMR to advance £3.17s.9d. an ounce to the producers on receipt of the refined gold and then to auction it to achieve the best possible price, with the brokers bidding at the Fixing. The premium was pooled and forwarded to the producers every six months. The first Gold Fixing took place on 12 September 1919 and achieved a price of £4.18s.9d. per ounce. Bids were made by telephone during those first few days, but this proved inconvenient and it was quickly decided to hold a regular formal meeting each day at 11am in the Rothschild offices in New Court, St Swithin’s Lane.
The Gold Standard
In 1925, Britain made a partial return to the Gold Standard, but it was again suspended on 21 September 1931 at the height of the international financial crisis. Over 200 years of a stable gold price, interrupted only during the Napoleonic Wars and First World War, had come to an end. The reputation of sterling backed by gold as the international currency was severely damaged and sterling was devalued. The USA remained on the gold standard with the price fixed at £20.67 per ounce until 1933, when President Roosevelt not only banned the export of gold and halted the convertibility of US dollars into gold but also ordered US citizens to hand in all gold they possessed. On 31 January 1934 the gold price was raised to $35 per ounce (a total devaluation of the dollar of almost 40%), and the US resumed the gold standard.
Suspension on the outbreak of War and post-war Fixing
With the outbreak of the war on 3 September 1939, the London Gold Market closed. The final fixing was £8.1s.0d per ounce. The procedure was not to be resumed until 22 March 1954 after a gap of almost 15 years. The price was £12.8s.6d, reflecting the devaluation of sterling in the intervening period. Although the Fixing was in sterling, the main concern of the Bank of England was to keep it in line with the equivalent of $35 per ounce, a task which became increasingly difficult as the market grew. As early as 1961 the Bank of England had to sell occasionally from its reserves to hold the $35 price. A solution seemed to have been found with the creation of the gold pool – an alliance between central banks to maintain the $35 level. The pool worked well until 1965 when private buying of gold began to exceed mine supply, forcing central banks to sell reserves into the market to hold the price steady.
In 1968, when the Tet offensive in Vietnam triggered a tidal wave of buying, the pool lost 3,000 tonnes trying to hold the price down. On 15 March the authorities closed the London Gold Market for two weeks, following the unprecedented three-day speculative surge of gold buying. When it re-opened on 1st April, it fixed the price in dollars, not sterling, with the gold price no longer set but free to float. At the same time, the step was taken of moving to a twice-daily price-fixing, at 10.30am and 3pm.
In August 1971 President Nixon repudiated the obligation of the USA to redeem its dollars in gold. The last link between the dollar and gold was gone. The result of this decision was inevitable, and in February 1973 the world currencies ‘floated’. By the end of 1974, gold had soared from $35 to $195 per ounce. On 1 January 1975, after 42 years, it again became ‘legal’ for individual Americans to own gold. Anticipating demand, the US Treasury in particular and other central banks sold large quantities of gold, taking large paper profits in the process. This depressed the gold price to $103 and perhaps more importantly ‘burned’ a number of small investors.
On 21 January 1980 a price of $850 per ounce was reached during the Gold Fixing, an all-time high over the entire history of the Fixing. A combination of political crisis in the Middle East, high oil prices and inflation, prompting strong physical and speculative buying, underlay this record.
The Gold Fixing process
Through the changing fortunes of the twentieth century, the ritual of the Gold Fixing remained constant. The Gold Fixing was co-ordinated by the NMR Treasury Department (later Treasury Business Operations). The representatives of the five members of the London Gold Market assembled in a small panelled room, watched over by the portraits of crowned heads of Europe, former NMR’s clients. Each representative sat at a small desk equipped with a telephone and a small flag, the Union Jack. At the centre sat the Chairman of the Fixing, traditionally the representative of N M Rothschild & Sons. To begin proceedings, the Chairman announced an opening price which was reported back, by telephone, to the dealing room of each of the houses represented at the Fixing. They in turn relayed the price to their customers around the world. On the basis of orders received, each dealing room instructed its representative at the Fixing to declare as a buyer or seller of a certain number of bars. If a balance of buyers and sellers was achieved within the room the price is fixed; if not the process was repeated at a higher or lower price until a balance was achieved. At that moment the Chairman declared the price ‘fixed’.
At any stage, customers could be advised by telephone of price changes and could alter their instructions. While these discussions were going on, the representative raised his flag to indicate unreadiness to settle. Only when all the flags were lowered on the table and the balance was achieved could the Chairman declare a ‘Fix’. Normally the process took only a few minutes. The longest Fixing on record, in the turbulence following the Stock Market collapse of 1986, took two hours and fifteen minutes.
The end of the Gold Fixing at New Court
On 14 April 2004, N M Rothschild & Sons Limited announced its withdrawal from commodities trading, including gold. The decision was taken following a strategic review of the services offered by N M Rothschild & Sons. As part of this decision, N M Rothschild & Sons announced its withdrawal from the twice daily London Gold Fixing which it had chaired since 1919. On 4 May 2004, the final Gold Fixing to be hosted by N M Rothschild & Sons took place in the Gold Fixing Room at New Court. On 26 May it was announced that Barclays Capital had acquired N M Rothschild's seat on the London Gold Market Fixing.
The same year, the digital age finally caught up with the ritual of the Gold Fixing and it now takes place in the virtual environment. But for 85 years the well-tried procedures, enviable in their simplicity and effectiveness, tested well over 15,000 times in every type of circumstance, provided the daily benchmark against which a great deal of the world’s physical gold business was transacted. The small room in St Swithin’s Lane played its part in oiling the wheels of the world’s commerce.