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THE LONDON FIXING

The London Fixing (or Gold Fix) is the setting of the price of gold that used to be held on the premises of Nathan Mayer Rothschild & Sons by the members of The London Gold Market Fixing Ltd. However, in 2004, Nathan Mayer Rothschild left the precious metals business in London and sold its place on the fixing to Barclays. From that time onwards, the fixing has taken place via a dedicated conference line. This was clearly a necessity as some banks moved their London operations away from the close proximity to the Bank of England and gravitated to areas such as Canary Wharf. However, the benchmark is still determined twice each business day of the London bullion market - the exceptions to this being Christmas Eve and New Year's Eve when there is only one fixing which is in the morning. It is designed to fix a price for settling contracts between members of the London bullion market, but the gold fixing informally provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world's markets. The gold fix is conducted in the United States dollar (USD), the Pound sterling (GBP), and the Euro (EUR) daily at 10.30am and 3pm, by London time.

The current participants in the fixing are Barclays, the Bank of China, Bank of Communications, Goldman Sachs, HSBC Bank USA, JPMorgan Chase, Morgan Stanley, Société Générale, Standard Chartered, Scotia Mocatta (Scotiabank), the Toronto-Dominion Bank, and UBS. The five participating banks are market makers. They may have gold orders on their own behalf (proprietary trading), their clients' behalf (brokerage), or frequently some of each. Client orders will generally be limit orders. A buy limit order isn't executed unless the price is above a pre-set value. A sell limit order isn't executed unless the price is below a pre-set value. The lead participant will begin the fixing process by proposing a price near the current gold spot price. The participants then simulate the result of trading at that price. The simulations do not merely factor physical gold, but include gold trading contracts ("Paper Gold") which are marginally backed and which therefore inflate market volumes and alter the supply/demand valuation formulas that would otherwise apply to the physical gold commodity.

First, each bank looks at its limit orders and determines how many are eligible to trade at that price. They can also consider how much gold their proprietary trading desk would trade at the same price. The bank then states a single value, the net amount (in ounces) of gold they wish to buy or sell. After each bank provides this value, they determine if the overall net amount is 0. If so, all transactions succeed and the fix is complete. The chair then states, "There are no flags, and we're fixed." Otherwise, the chair must change the proposed price. If the amount of gold the banks proposed to buy is higher than the amount proposed for sale, he must raise the price. That will decrease the number of proposed purchases, both because more buy limit orders will fail and because of proprietary traders. At the same time, it increases the number of proposed sales, both because more sell limit orders succeed and because of proprietary trading. Conversely, if the amount proposed for sale is higher, he must lower the price. This will have the exact opposite effects from above, increasing the number of proposed purchases and decreasing the number of proposed sales. This process iterates until a fix is found. Buyers are charged 20 cents per troy ounce as a premium to fund the fix process; this results in an implicit bid-offer spread. As with other forms of market making, participants attempt to predict the direction of the market and increase profits through timing. Participants can pause proceedings at will. Originally, it was done by raising a small Union Flag on their desk. Under the telephone fixing system, participants can register a pause by saying the word "flag.