You may be watching the fluctuating gold prices, wondering to yourself “how do those bigwigs at the LBMA come up with this stuff?” In this post, we’ll go over the basic factors of supply and demand that influence the gold fixing process.
To start, the chairman of the fixing sets the opening price for gold, which is at or near the current spot price of gold. The rest of the members then begin trading simulations for gold orders on the behalf of their interests and those of their clients. These gold orders are defined by limits (e.g. buy up gold, but only if it costs less than $X, or sell gold, but only if you can get more than $X per ounce). The objective is to find a balance of buying and selling.
After trading simulations are run, fixing members declare whether they have a net buying or selling interest, or neither. If, for example, the amount of gold the members propose to buy is higher than what they propose to sell, the chairman raises the price. This moves the price of gold to a favorable balance for two reasons. First, the number of buy-orders will decrease if the price increases. Second, the number of sell-orders will increase for the same reason.
This process continues until supply and demand meet (or the imbalance is 50 good-delivery bars of gold or less), then the price is fixed. Of course, there are more complexities when it comes to the trading simulations, pausing the proceedings, and pro rata deals between individual members. But, the core of the process is to find the balance between supply and demand.
A few months ago, the government of Peru prioritized efforts to crackdown on illegal gold mining and smuggling operations occurring in the country. Smugglers would transport the gold from mining outposts across the Bolivian border, where it would be laundered and exported out of the Bolivian capital of La Paz.
Until the crackdown began, smugglers were quite busy. According to Reuters, Bolivia officially exported 24 tons of gold between January and August – six times more than Bolivia’s gold miners produced during the first seven months of the year. This has had several negative consequences:
- Unregulated mining damages the rainforests
- Mercury used in the mining operations poisons the water and surrounding land
- The smuggled gold drives down Bolivian gold prices, hurting the local markets
The Peruvian government has made some progress – smuggling operations are reported to have been reduced by about 50%. But, with 1,000 km of unsecured border between Peru and Bolivia, there may still be challenges ahead.
Reuters reports that nearly all of Bolivia’s exported gold went to the US. We encourage all of our gold buying friends and readers to do their due diligence in securing conflict-free gold.
Contrary to the expectations of economics experts, the Indian government has announced the lifting of some restrictions on gold imports – which may have worldwide consequences for the gold market.
The story begins in 2013 with India’s currency crisis. The balance of trade for the country was off kilter, to say the least. The country’s account deficit surged to about 5.5% of its GDP, causing devaluation of the Rupee. Since India’s imports were outpacing its exports by such a wide margin, changes needed to be made. Since gold is India’s second biggest import (and it doesn’t contribute as much to the country’s infrastructure) restrictions were put in place specifically for gold importation.
The Indian government announced that it would lift a rule requiring importers to re-export at least 20% of the gold they brought into India. Since 2013, India has managed to get its account deficit down to just about 1%. Even though the discouragingly high 10% gold import-duty remains in place, it seems that government officials are no longer as concerned about the balance of trade.
As restrictions are lifted, the demand for gold will increase, which may affect prices in the future. Make sure to watch the trends by using our gold price tracker.