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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Gold benchmark hit by volatility after banks exit

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LONDON: London’s gold benchmark experienced large, unpredictable fluctuations after some banks left the auction that sets the price relied upon by the $5 trillion-a-year bullion market, according to an analysis of trading data.


The benchmark is meant to be a fair and accurate daily snapshot of the fast-moving “spot” market and is used by gold producers and consumers around the world to price contracts.


Its level is set by the London Bullion Market Association (LBMA) Gold Price auction, which sees big banks and brokers electronically input their trading orders, with an algorithm matching buyers to sellers and setting the price.


But trading volumes fell sharply after April 10, when four of the 14 participating banks and brokers stopped taking part after the auction’s administrator, Intercontinental Exchange (ICE), introduced a requirement to clear that meant participants had to modify their own IT systems and procedures.


Lower liquidity — which fuels volatility — led to the benchmark diverging more widely from the underlying spot price, according to the analysis of ICE and trading data, leaving gold buyers and sellers around the world with large unexpected gains or losses.


In the three weeks after clearing was launched, average trading volumes were a quarter lower than in the previous three weeks and the average difference from the spot price tripled to 87 cents from 29 cents, the analysis shows.


The biggest divergence, on April 11, saw the auction settle $12.20 — or 1 per cent — away from the spot price.


Even excluding this large swing, the average divergence in the period rose to 42 cents.


Volumes have, however, recovered since the start of May and divergences have narrowed. — Reuters


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