US regulator considering an inquiry into London's gold and silver markets to check if prices are open to manipulation

This article is more than 7 years old

This article is more than 7 years old

London's financial sector was last night bracing itself for another official investigation into alleged price-fixing following reports that a US regulator is considering launching an inquiry into the City's gold and silver markets.

The Commodity Futures Trading Commission is discussing whether the daily setting of gold and silver prices in London is open to manipulation, according to the Wall Street Journal, which stated that the CFTC is examining whether prices are derived sufficiently transparently.

The system of setting gold prices in London is unusual and involves a twice-daily teleconference involving five banks – Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale – while silver is set by the latter three. The price fixings are then used to determine prices worldwide.

The news of the potential investigation comes after analysis of a similarly unusual system - the process used to determine the London interbank offered rate, known as Libor – uncovered manipulation and triggered multi-billion dollar fines against a group of banks.

Barclays was hit with a £290m fine last year, which resulted in the departure of its chief executive Bob Diamond and chairman Marcus Agius. Royal Bank of Scotland is paying fines of £390m for its role in Libor-rigging.

The fixing of the gold price in London dates back to September 1919, when the process involved NM Rothschild & Sons, Mocatta & Goldsmid, Samuel Montagu & Co, Pixley & Abell and Sharps & Wilkins.

At the start of each gold price-fixing, the chairman announces an opening price to the other four members who relay this price to their customers. Based on orders received from them, the banks declare themselves as buyers or sellers at that price.

Provided there are both buyers and sellers at that price, members are then asked to state the number of bars they wish to trade.

Spokespeople for all five banks involved did not comment when contacted last night.

If at the opening price there are only buyers or only sellers, or if the numbers of bars to be bought or sold does not balance, the price is moved and the same procedure is followed until a balance is achieved. The silver fix dates back to 1897.