University of Western Australia (UWA)
For over a hundred years the daily benchmark price for precious metals, including gold, was set by a small group of London bankers. The benchmark price, or ‘London Fix’, was used to settle contracts, price trades, calculate royalties, commissions and value financial derivatives by governments, central banks, traders, miners, refiners, private investors and pension funds. But was the pricing system open to abuse?
Research Impact Summary
- Following publication of the research, multiple civil and criminal trials were launched against the banks that set the gold price.
- Regulatory investigations began and fines were issued.
- Benchmarking regulations were overhauled and manipulation was criminalised.
- As a result of the research the London Fix was replaced with electronic auctions that provide fairer and more transparent systems of commodity price benchmarking.
PhD to Fixing the Fix
In 2013, Andrew Caminschi, then a UWA PhD candidate, researched the relationship between London Fix prices and public market prices for gold, silver, platinum and palladium. The research, and the basis for his doctoral thesis, required the analysis of hundreds of millions of transactions, quotes and orders.
It revealed that the fixing process produced a biased benchmark price that could affect global financial markets. (Precious metals markets had ballooned over the century to exceed US$30 trillion annually).
The trade advantage for the fixing banks proved to be significant and it increased with the transition to electronic derivatives trading. But the findings mainly cast doubt on the integrity of the gold price—the most critical metal in the market.
Spotlight for Change
In September 2013, Sprott Asset Management, a global metals investment fund manager, published the story. Bloomberg ran it in November 2013 and within hours it headlined across media outlets worldwide. Regulators were forced to acknowledge the vulnerabilities of this critical pricing mechanism.
Finishing the Fix
In March 2015 the Intercontinental Exchange Benchmark Administration replaced the London Gold Fixing practice with the London Bullion Market Association Gold Price. Pricing mechanisms for other metals were similarly transformed. Caminschi’s research led to a fairer pricing mechanism that was auditable, based on real-time data and accessible by market participants.
Continuing in the Courts
Dr. Caminschi is now an expert consultant in several on-going court proceedings seeking redress of financial harm related to gold, silver, platinum and palladium pricing, and has extended this work to assist regulators, litigators and plaintiffs in other financial markets including foreign exchange, government bonds, and interest rate benchmarks.
In October 2016 Professor Robert Webb of the University of Virginia said, ‘His research on the London gold fixing has literally changed the way that price is determined.’ The banking and finance industry recognised the research by bestowing numerous awards.
For further detail, read the Impact Study on the ARC website.