Barclays PLC has been sanctioned by British regulators in a case that raises questions about how the price of gold is set. On Friday, Britain's Financial Conduct Authority, FCA, fined Barclays £26-million, or $48-million, for failing to control a trader who managed influence the price of gold in June, 2012, generating a profit of $1.75-million (U.S.) for the bank.
The gold price is set or "fixed" by four banks – Barclays, HSBC, Société Générale and Bank of Nova Scotia – through matching buy and sell orders during twice-daily phone calls. The process dates back more than 100 years but it has come into question as regulators begin probing how other benchmark prices are set such as the London Interbank Offered Rate, or Libor, a key interest rate used by banks.
In the Barclays case, the FCA said trader Daniel Plunkett, created enough fake orders to push the price of gold below a certain threshold that would have required Barclays to pay a client $3.9-million. By missing the threshold, Mr. Plunkett's trading book profited by $1.75-million, the FCA said.
"A firm's lack of controls and a trader's disregard for a customer's interests have allowed the financial services industry's reputation to be sullied again," Tracey McDermott, the FCA's director of enforcement and financial crime, said. "Plunkett has paid a heavy price for putting his own interests above the integrity of the market and Barclays' customer."
In a statement, Barclays said it regretted the situation and had "undertaken a significant amount of work" to enhance its systems and controls.
The timing of the fine won't help Barclays' ongoing efforts to leave behind past problems and restore its reputation. The price fixing case took place just a day after Barclays was hit with a $450-million fine by British and U.S. regulators over attempted rigging of the Libor, which is calculated daily by the British Bankers' Association, a private trade association. The BBA sets Libor on the basis of information gathered from a group of banks around the world, including Barclays. Several other banks were also sanctions for alleged rate rigging.
Regulators have also been looking into how prices for other commodities, such as Brent oil, are set. And last week another group of three banks that sets the price of silver decided to end its 117-year old tradition and began looking at an alternative method.
While some effects of these reviews are beginning to spill into the market in terms of more transparency, it is questionable whether the Barclays' fine will significantly change the gold fix process. Friday's fine for Barclays was the first time a regulator has charged a company with wrongdoing in connection with setting the gold price.
"Talking to a lot of traders, it doesn't seem anyone believes there is collusion," said Jessica Fung, a commodities analyst for BMO Capital Markets in Toronto. She added that the overall problem is a lack of transparency. "A lot of us who don't necessarily sit on the inside have contracts based around the prices and don't have any insight. You are either in it or out of it."