What is a Gold Fix?
A gold fix occurs when the The London Gold Market Fixing Ltd. sets the price of gold.
How Does a Gold Fix Work?
To perform a gold fix, the five members of The London Gold Market Fixing Ltd. (the five biggest bullion banks) and its chairman essentially determine where supply meets demand for all of the bank's pending buy and sell orders.
The process occurs twice a day (10:30 a.m. and 3 p.m. London time) via conference call. The gold fix generally begins with the chairman declaring a gold price very near the spot market gold price. The participating banks then disclose the net amount of gold they would buy or sell at the proposed price based on the orders they have on hand. The chairman adjusts the price up or down and the participating banks again indicate the net orders they could fill. The process continues until the group finds the price that balances the buyers and sellers.
It is important to note that many of the banks' orders are limit orders, meaning that the buyer or seller has indicated that he or she is willing to buy or sell at any price above or below a certain limit. Thus, as the chairman raises or lowers the price, more orders may drop out of or come into the pool, which increases or decreases supply or demand.
When the price finally comes into balance, the banks execute the large pool of orders at a common price. This means that customers have to wait until the fix occurs in order to find out how their trades executed. The bank participants earn a small fee on the fix.
Why Does a Gold Fix Matter?
The gold fix is a major part of the trading day in the gold world because it essentially sets the price of gold bullion and thus all other gold-related products (including derivatives). However, it does not set the price of gold for the whole day. In fact, the gold fix is simply the price agreed to at that point in time; within minutes, the price of gold will fluctuate again.
It is important to note that the gold fix is dominated by a few large banks that trade gold on behalf of their customers or directly with their customers (as principals). Because the banks can become buyers or sellers themselves, the banks have a considerable influence on the price at which they are willing to buy and sell.