The London fix price for gold or silver is the result of bringing precious metals pricing into equilibrium. This process is called silver or gold fixing. I’ll discuss this more in a moment. I need to present a little background information first.
Gold, platinum and palladium prices are fixed twice per day. The silver price is fixed only once per day.
Since this website’s theme is gold and silver, this discussion is limited to fixing silver and gold bullion prices.
London is ground zero for wholesale physical silver and gold bullion transactions worldwide. Gold and silver derivatives (forwards and options) are also traded via “Loco London.”
Loco London refers to London-based bullion bank accounts that are used in a high percentage of daily wholesale silver and gold bullion transactions.
Banks listed with the London Bullion Market Association (LBMA) facilitate wholesale transactions on their own behalf and for their clients in an over-the-counter (OTC) trading environment.
OTC trading occurs between buyers and sellers outside the governance of a commodity exchange.
Why are silver and gold fixing performed in London? As mentioned earlier, the lion’s share of physical wholesale precious metals trading is settled in London.
The concentration of trading in London afforded the major banks the opportunity to meet daily (in person) to coordinate discovery of silver and gold bullion market prices. Now it's done during scheduled conference calls.
Also the logistics of moving silver and gold bullion between LBMA vaults is more feasible when the depositories are in close proximity to one another.
A price in equilibrium, when the quantity in supply equals the quantity in demand, is a market driven price at which point the good/service is the most efficiently allocated. See theoretical equilibrium price below.
For example, an equilibrium gold price is when the number of gold bullion bars for sale is equal (or within 50 gold bars) to the quantity in demand.
A price in perfect equilibrium (supply exactly equals demand) is not achievable every time. So supply and demand must be within 50 gold bars before a gold price is considered fixed.
Theoretical Equilibrium Price
Certain LBMA market makers meet at 10:30 AM and 3:00 PM GMT via telephone (London time) for gold and 12:00 noon GMT for silver with the express purpose of discovering equilibrium prices for each precious metal.
The key market makers that drive the London fix price process for gold are:
1NOTE: Also a participant in the silver fixing conference at 12:00 noon.
The committee’s chairperson declares the opening price. The remaining members consult their respective traders to determine if that price enables supply and demand parity.
If the opening price is unsuccessful, the price is changed. The price is raised if there’s a surplus of buy limit orders. However, if there’s an excess of sell limit orders, the price is lowered.
Raising the price can lower demand since buy limit orders below the revised price are cancelled. By lowering the price, sell limit orders above the new price are terminated resulting in less supply.
Some clients are advised during the silver or gold fixing session enabling them to change their orders before the London fix price for gold/silver is set.
The London fix price process has some of the characteristics of an auction. An environment that fosters competition like an auction is necessary when discovering true market prices.
Others, not knowing the price, place orders instructing their dealers to trade once the silver or gold fixing is complete. They do so trusting that the process will render a fair price.
Price discovery (i.e. gold fixing) between the committee and its traders continues until all of the members agree that demand and supply are in equilibrium.
Once all five members are in agreement, the chairperson declares the price fixed until the next silver or gold fixing session.
When buying physical silver and gold bullion, your dealer will likely use one of the three prices listed below as a baseline to price his/her bullion products:
Once again, the London fix price for gold or silver reflects the most efficient price/quantity combination for these two precious metals.
However, spot prices fluctuate throughout a trading cycle (nearly 24 hours) providing up-to-the-minute prices. These floating prices can enable investors to make more timely, and possibly more profitable, trades.
Investors not interested in making trades based on short-term price changes may prefer the London fix price. Monitoring both prices couldn't hurt if you can afford the time.
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