Gold: The Next Libor Scandal
The Libor scandal is so 2012 you guys, so so boring, but thank goodness we have a brand new market-rigging scandal to enjoy now, one that will entertainingly interest the hyper-paranoid: Yes, the next Libor scandal is in gold.
Believe it or not, the global benchmark prices for gold and silver, the “London spot” prices, are not set by such old-timey folderol as “trading,” but by a small cabal of European banks that get together twice a day and decide what they think the price of gold and silver should be.
If that sounds familiar to you, then you win the prize for staying awake through all of last year’s tedious stories about the Libor scandal. The gold-pricing process is in fact akin to the process of setting the London Interbank Offered Rate, or Libor, a key short-term interest rate. In that case, a slightly larger group of banks sets Libor each day by self-reporting their borrowing costs, and it turns out they had constantly manipulated it for years and years.
The Commodity Futures Trading Commission thinks it’s possible that something could also be amiss with the system for pricing gold and silver and has started asking around about it, the Wall Street Journal reports. It’s not a formal inquiry yet; we’re still just in the getting-to-know-you phase of the scandal, if that’s what this is going to be.
The London Bullion Market Association, which has nothing to do with the pricing, tells the WSJ that the gold-pricing process is “fully transparent. It’s nothing like Libor.” And as the Guardian notes, the process of setting gold and silver prices does involve some input from the banks’ customers.
But you could forgive the CFTC for wanting to double-check all the same. After all, a study last year by the International Organization of Securities Commissions found that bankers will just straight-up manipulate any interest rate they can get their hands on in this fashion, all over the world. If they’ll manipulate interest rates, why not manipulate other stuff, too, like gold? Or silver, or coal, or any other market where benchmark prices are set this way?
It also happens that the five banks that set gold and silver prices include three that have settled or are under investigation for manipulating Libor. Those would be Barclays, which paid $450 million to settle Libor charges last June; Deutsche Bank, which has already suspended some traders and is reportedly close to settling its own Libor charges; and HSBC, which is also under investigation in the Libor scandal and last year agreed to pay $1.9 billion to settle money-laundering charges.
The other two banks are Bank of Nova Scotia and Societe Generale, whose noses are relatively clean, unless you count SocGen’s failure to rein in alleged rogue trader Jerome Kerviel.
This doesn’t mean the banks are guilty of manipulation. But it’s another reason for the CFTC to feel the urge to double-check.
SocGen declined to comment. The other banks did not immediately respond to requests for comment.
One sticky question here, maybe even more so than in the Libor scandal, is: so what? Who really gets hurt if the price of gold is off by a few dollars here or there? Well, the London spot price of gold affects jewelry prices, derivatives and raw-materials costs, the WSJ points out. There could be some deep-pocketed people claiming victimhood down the road.