GOLD - THE DYNAMICS

Toastmaster of the day, Mr President, fellow toastmasters and guests – a warm good evening to you all. 

Being in a foreign country comes with a different set of problems. Recently I have faced one such situation.  Some of my wife’s friends polluted her mind and she has suddenly asked me to buy gold. As a dutiful husband I have checked up the price of gold here and found that it is almost the same as in India.  

Unlike other metals, many of the gold ever mined is still exist in the market. Roughly around 165,000 tons of gold have been mined in the history of mankind. If you want to visualize, it will be a solid cube of size 20 meters that is about 8000 cubic meter.  

We all know that gold is one important vehicle of investment as an asset class and people believe that it is much safer in times of economic turbulence and political uncertainty.  

India is the single largest consumer of gold and Indians are buying 800 tons of gold annually, which is around 25% of world’s annual gold production. This includes around 400 tons of gold that is being imported into India and the balance is the reused gold.  

But the biggest question is how the price is fixed? How could the price be the same in South Africa which has the major mines and in India and China, the two largest consumers of Gold? May be an interesting subject for us to know and understand.

Because most of the gold ever mined still exists and is potentially able to come on to the market for the right price, unlike most other commodities, the hoarding and disposal plays a much bigger role in affecting the price.

The Gold Fix, or the London Gold Fixing, is the procedure by which the price of gold is set on the London market by the five members of the London Gold Pool. It is designed to fix a price for settling contracts between members of the London bullion market, but, informally, the Gold Fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products throughout the world’s markets. 

London's deserved its reputation as the world's leading international bullion trading centre has its basis in history.

The origins of the emergence of London as a gold trading centre can be traced back to around 1671 when the young Moses Mocatta crossed the North Sea from Amsterdam (where he had been trading in sugar and diamonds) to set up business in London.

Initially his main business was in diamonds, but records from the East India Company in February 1676 show 'By cash of Moses Mocatta for freight on 75 ounces of gold on their ships - £6'. This gold was used to pay for pepper from India, and shipments of gold and silver in and out of London soon became regular events. 

In 1919, Bank of England signed an agreement with the seven major gold mining houses of South Africa, to ship their raw gold to England for refining and the refined gold will be sold through M/s N.M.Rothschild & Sons by obtaining the best possible price. The first fixing took place on September 12, 1919 amongst the five principal gold bullion traders and refiners of the day. Now it is a 92 year old institution.

The price of gold then was 4 pounds 18 shillings and 9 pence per troy ounce.  The gold price fix takes place initially at 10.30am and from 1968 at 3pm also in London time. The afternoon fix was added for the benefit of New York markets.

Due to government controls and war emergencies, the London Gold Fixing was suspended between 1939 and 1954. Historically, the Fixing took place daily at the City offices of N M Rothschild & Sons, but since May 5 2004 it takes place by telephone. 

In April 2004, N M Rothschild & Sons announced that it planned to withdraw from gold trading and from the London Gold Fixing. Barclays Bank took its place from 7 June 2004, and the chairmanship of the meeting, formerly held permanently by Rothschilds, now rotates annually.

While gold is traded in markets throughout the world, the market is essentially homogeneous since the gold price is always in dollars and the gold traded is "loco London" (gold deliverable in London and meeting London trading standards). 

The London PM fix is normally considered the main reference price for the day and is the price most often used in contracts. The chairman begins with a ’trying’ price. The market members then declare how much gold they are prepared to buy or sell at that price. Once the equilibrium is reached, the gold price is fixed. 

On very rare occasions the price will be fixed when there is disequilibrium, at the discretion of the chairman of the fix. A tradition of the London Gold Fixing was that participants could raise a small Union Flag on their desk to pause proceedings. Under the telephone fixing system, participants can register a pause by saying the word "flag", and the chair ends the meeting with the phrase "There are no flags, and we are fixed”  

Over the course of more than 90 years of the gold fixing, the highest fix was US$850 per ounce on the 21st of January 1980, amid the political crisis in the Middle East, high oil prices and inflation.  However, with inflation, the 1980 high would be equal to a price of $2800 in today’s dollars. So, the 1980 record still holds in real terms.

The longest fixing lasted for 2 hours and fifteen minutes when the stock markets crashed on Black Monday in late October 1987. The highest turnover occurred in March 1968 just before the gold pool collapsed - 14,180 400oz London Good Delivery bars were traded.  

I have collected enough interesting information on the dynamic of the gold market and now have to collect enough money to buy that yellow metal. Any of the toastmasters ready to help me?

Over to you toastmaster of the day!