Gold market manipulation is sometimes dismissed as the chatter of conspiracy theorists. But according to The Wall Street Journal (WSJ), US regulators have joined the conversation. People with knowledge of the matter told the WSJ that the US Commodity Futures Trading Commission (CFTC) is considering whether the gold prices set in London are being manipulated.
A formal investigation has not been launched, but internal discussions are reportedly taking place at the CFTC about the setting of the gold and silver fix in London.
The Libor scandal, which involved interest rate rigging, provides a valid reason to review and potentially investigate all financial benchmarks, according to Bart Chilton, one of the CFTC’s commissioners.
“The idea that pervasive manipulation, or attempted manipulation, is so widespread should make us all query the veracity of the other key marks. What about energy, swaps, the gold and silver fixes in London and the whole litany of ‘bors?” Why would they be any different in the minds of those that may have sought to push or pull rates,” Chilton said ahead of a roundtable event in Washington last month.
The International Organization of Securities Commissions (IOSCO) seems to agree that lack of oversight presents the risk of other benchmarks being manipulated.
A Bloomberg article notes that a confidential IOSCO paper states that “the risk of manipulation will be greater where participants in the process have both incentive and opportunity to submit inaccurate data or apply a methodology inaccurately.”
“Furthermore, where judgment is required in determining the data to be submitted, the problem is particularly acute,” the paper also states.
The Libor scandal occurred under a system where numerous banks were asked on behalf of the British Bankers’ Association to honestly report how much it cost them to borrow from other financial institutions, according to Bloomberg. The figures they reported were then used to calculate benchmark lending rates. Unfortunately, some firms were submitting false information.
In contrast to the Libor system, only five banks are involved in setting the London gold price: Societe Generale (EPA:GLE), HSBC Holdings (LSE:HSBA,NYSE:HBC), the Bank of Nova Scotia (TSX:BNS,NYSE:BNS), Deutsche Bank (NYSE:DB) and Barclays (NYSE:BCS).
London’s silver fix involves an even smaller group of just three banks: HSBC, the Bank of Nova Scotia and Deutsche Bank.
Though only a few firms are involved in setting London’s gold and silver fixes, these prices affect metal transactions on a global scale.
The CFTC is credited as playing the lead role in unearthing the Libor scandal. The agency’s chairman, Gary Gensler, has also reportedly been appointed as the head of a task force that will examine financial benchmarks and help develop policy guidelines for them. But many people have deeply ingrained skepticism about any efforts made by US regulators with regards to the precious metals markets.
The CFTC has been intensely criticized for blatantly ignoring manipulative acts in the past. And it has not helped that an investigation into silver manipulation that the agency launched in 2008 has still not been resolved.
One critic of the agency is Chris Powell, secretary/treasurer of the Gold Anti-Trust Action Committee (better known as GATA).
“None of us alive today have ever seen a free gold price,” he told CNBC last week.
Powell dismissed the news of the CFTC’s internal discussions about metal price manipulation as likely just a response to pressure from the public.
“When the attorney general of the United States says the banks are bigger than the government, I don’t think we can expect the CFTC to be candid with us on this issue,” Powell said, referring to Attorney General Eric Holder’s comments that big banks are too big to jail.
But across the pond, views of the CFTC are colored with thoughts of RBS, UBS (NYSE:UBS) and Barclays paying penalties of $2.5 billion for their role in the Libor scandal, with about half of that money going to the CFTC. The Guardian said that after the WSJ story broke, London’s financial sector braced itself for an official investigation.
Securities Disclosure: I, Michelle Smith, hold no direct investment interest in any company mentioned in this article.