Barclays Rigged the Gold Price

The London gold fix is … fixed. Or is it? Yesterday U.K. authorities fined Barclays Group (BCS) $44 million for manipulating the benchmark gold price. This was for a single incident two years ago with irrefutable evidence.

Gold bugs have argued for years that big banks were rigging the gold price. The argument is over now. Today I’ll show you proof that a major bank did rig the gold price — in London on June 28, 2012, to be precise.

The interesting part is that the banker whose hand was in the pot of gold barely gave it a thought. He seemed to think this was routine business.

Maybe that’s because it was routine business.

Pot o gold

***

Last fall I reported on an Australian researcher’s finding that inside information was leaking out of the twice-daily London gold fix. Professor Andrew Caminschi based his conclusion on gold trading volumes. Heavy activity during the conference call in which five banks decide on the gold price pointed to manipulation, said Caminschi (see Fixing the Gold Fix).

Now, thanks to a finding by the U.K. Financial Conduct Authority, we can put a name and date on one such manipulation. A Barclays trader named Daniel Plunkett did it to save the bank $3.9 million on a custom gold option it had sold. The bank’s client would have been due that amount if the gold fix exceeded $1,558.96.

Here is how the FCA describes the incident in its statement.

Mr Plunkett placed orders during the 3:00 p.m. Gold Fixing on 28 June 2012 with the intention of increasing the likelihood that the price of gold would fix below a certain level, preferring his interests over those of Customer A.

In particular, he placed a large sell order of between 40,000 oz. (100 bars) and 60,000 oz. (150 bars) with Barclays’ representative on the Gold Fixing, then withdrew it completely one minute later and subsequently placed another large sell order of between 40,000 oz. (100 bars) and 60,000 oz. (150 bars) two minutes after that.

These orders contributed to the price of gold fixing at a level which was lower than the Barrier specified in a digital options contract that the firm had previously entered into with Customer A. As a result, Barclays did not have to make a USD3.9m payment to Customer A.

The statement has several interesting angles.

First, Plunkett’s first order was for 40,000 ounces of gold. That was about $62 million at the time. He canceled the order one minute later and tried to sell 60,000 ounces. This might be a small amount of money to the bankers, but it’s a fortune to most people.

Second, notice how Barclays was playing both sides of the fence. The bank took one side of option trades whose outcome depended on the London Gold Fix. Who decides the gold fix? Barclays does, along with four other banks. That’s a nice deal.

Third, if you follow the link above and read the rest of the story, it turns out “Customer A” immediately knew it had been victimized, complained to Barclays management and subsequently received its $3.9 million.

As far as I can tell, all this happened before the authorities investigated the incident. How many other people lost money that day and didn’t know enough to complain? We can’t know, but I’m sure the number is more than zero.

This incident occurred only one day after Barclays got hit with a £290 million fine for manipulating the London Interbank Offered Rate, or LIBOR. You might think they would be on their best behavior after that. If so, you would be wrong. Mr. Plunkett apparently didn’t give it a second thought.

***

Am I saying we should give up on gold investing? No, not at all. Incidents like this one are aggravating, but they still only change the gold price by a few cents. The impact is minimal unless you are trading huge amounts like “Customer A.”

As with other shady practices like high frequency trading, I think the solution is not to play their game. Invest in gold, stocks, or anything else with professional guidance and a long-term outlook.

The best way to punish dishonest bankers is to let them swim in their dirty cash. You should be safely on the shore where you don’t have to worry about waves.

***

My Joe Biden to the Rescue post drew a lot of feedback. I’m not the only one who thinks it strange that a Ukrainian gas company appointed the vice president’s son to its board.

Reader Phil R. says: “Either this is incredibly coincidental or there is something shady going on with the Cyprus/Ukraine connection you are talking about.

“I am not normally a skeptic, but given the past dealings of our government, I would go with ‘something shady!’”

Brad: You’re right, Phil. The timing is just too perfect to be coincidence. Not everyone thinks it is suspicious, though.

Reader Tom S. says: “Why not try to look for the good in people, even if you don’t like their politics? Sheesh. You folks apparently smoke too much and are in a constant fit of paranoia in my opinion.”

Brad: Thanks for writing, Tom. I don’t smoke and I wasn’t trying to make a political point. I would call these events suspicious no matter who was involved.

With all the other things we’ve seen politicians in both parties do the last few years, I don’t think it is paranoia to be suspicious about these things. They’ve proven tragically and outrageously true on many occasions. If we don’t hold our elected officials accountable, who will?

As always, I welcome reader feedback on my afternoon thoughts or any other topics. Click here to send me an e-mail.

***

U.S. markets were surprisingly active ahead of the Memorial Day weekend. Here is what I see in the news…

  • The S&P 500 ended right at the 1,900 level to mark a new all-time record close. The index didn’t surpass the 1,902.17 intraday peak, though.
  • New home sales increased 6.4% in April according to new Commerce Department data. This was more than expected and the report revised March data upward, too. Home sales were strongest in the Midwest region.
  • Hewlett-Packard (HPQ) jumped 6.1%, but don’t get too bullish. The company announced its 11th consecutive quarter of declining sales. CEO Meg Whitman plans to protect profits by laying off another 16,000 workers in addition to the 34,000 previously announced job cuts.
  • Retailer results are still varying wildly between companies. GameStop (GME) shares climbed 4.2% after beating first-quarter earnings estimates.
  • Aeropostale (ARO) tumbled 24.6% after a dreadful quarterly report featuring a 13% drop in same store sales.
  • Sunday’s election in Ukraine looks set to go smoothly, with Russia signaling no intent to stir up opposition.
  • More details are coming out on the Russia-China natural gas export agreement. Most analysts think China got the better end of the deal, locking in lower prices while Russia will for a trans-Siberian pipeline to deliver the gas.
  • Maybe Putin should have hired Joe Biden to negotiate for him?

Your thoughts on “Barclays Rigged the Gold Price”

  1. Why don’t you deal with the fact that the Federal Reserve is a private bank that pays no income taxes but does pay property taxes?

Comments are closed.