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Gold industry eyes reform of century-old benchmark amid intense scrutiny

These are stories Report on Business is following Wednesday, June 18, 2014.

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All that glitters
The gold industry is coming together to look at how to reform a century-old benchmark.

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Of course, regulators are already looking closely at what is known as the London gold fix and other benchmarks.

Today's decision by the World Gold Council, and the probes by regulators, are important developments in Canada, home to huge gold miners and one of the banks that set the benchmark.

"The fixing process was established almost a century ago, so it is not surprising that it needs to change to meet today's market expectations for enhanced regulation, transparency and technology," said Natalie Dempster, the World Council's managing director of central banks and public policy.

"Modernization is imperative in order to maintain trust across the industry," she said in a statement.

Ms. Dempster and her colleagues at the industry body announced they are striking a forum to "explore reform" the London gold fix, which is set twice a day by a handful of major banks, including Canada's Bank of Nova Scotia.

The first meeting is set for early July in London. At the forum will be officials of the banks, refiners, industry groups, central banks and miners. Britain's Financial Conduct Authority will be there to observe, the group said.

"Our objective in convening this forum is to ensure that the full range of analysis and market perspectives from all parts of the gold supply chain are debated, understood and brought to bear on any potential changes," said Ms. Dempster.

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Which means, of course, that the industry wants its say if others, like regulators, move to reform the system first.

The council cited five areas it said are "highly desirable" for a new process to replace the one that began in 1919:

  • The benchmark should be based on executed trades, rather than quote submissions.
  • It should be a “tradeable price,” rather than a referency.
  • The data involved should be “highly transparent, published and subject to audit.”
  • The fix should be “calculated from a deep and liquid market,” involving a “significant volume of gold flows.”
  • It should represent a “physically-deliverable price,” given that many want physical delivery.

The group said it has already spoken to many in the industry, and that's how it came up with those five points.

As The Globe and Mail's Rachelle Younglai has reported, the benchmark is used by governments, mining companies and brokers to trade gold and derivatives.

Five banks had set the benchmark – along with Scotiabank, the others included Barclays, HSBC, Société Générale and Deutsche Bank – though the German bank gave up its spot.

The London silver fix, also a century-old benchmark, will end this summer.

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Why Canada had no choice
In the end, analysts say, the Canadian government had little choice but to approve Enbridge Inc.'s proposed Northern Gateway pipeline.

"I don't think the government had much of a choice but to effectively approve the project because of the impact on the Canadian economy," said Patricia Mohr of Bank of Nova Scotia, one of the country's leading commodities analysts.

Getting western Canadian crude to Asia-Pacific markets, she said in an interview, is "critical."

As The Globe and Mail's Shawn McCarthy, Steven Chase and Brent Jang report, the government approved the $7.9-billion project after markets closed yesterday.

Enbridge still must meet more than 200 conditions, and key will be discussions with Canada's First Nations, and the government of British Columbia, the country's westernmost province.

Northern Gateway would move more than 500,000 barrels a day of diluted bitumen to Kitimat, B.C., on the way to tanker transport to those key markets.

The biggest risk to Canada now, said Ms. Mohr is that the U.S. market for Canada's exports is "quite finite." While Texas refineries want heavy oil, she added, the threat is to Canadian light crude, which is in abundance in Alberta and Saskatchewan and must find a market.

Northern Gateway could also carry light oil, Ms. Mohr added.

Enbridge shares were unchanged in premarket action this morning, within about two hours of the New York open.

There's an app for that
BlackBerry Ltd. today announced a licensing deal with that will see more than 200,000 Android apps available with the launch of its BlackBerry 10.3 operating system in the fall.

"You will be able to access popular apps such as Groupon, Netflix, Pinterest, Candy Crush Saga and Minecraft – all available for direct download," the smartphone maker said on its blog.

The deal, it added, means users can access both the BlackBerry World app store, and the Amazon Appstore.

BlackBerry shares were up 2.7 per cent with 90 minutes to go before the Nasdaq open.

Markets tame
Investors are holding their fire this morning, awaiting this afternoon's policy statement from the Federal Reserve.

Tokyo's Nikkei gained 0.9 per cent, though Hong Kong's Hang Seng was little changed.

In Europe, London's FTSE 100 and Germany's DAX were up by between 0.2 per cent and 0.3 per cent by about 7:35 a.m. ET, while the Paris CAC 40 was flat.

Dow Jones industrial average and S&P 500 futures were similarly little changed.

The biggie today is the end of the U.S. central bank's two-day meeting, along with new projections and a news conference with Fed chair Janet Yellen.

"U.S. markets seem to have finished their short-lived dip, but ahead of the Fed meeting enthusiasm is in short supply," said market analyst Chris Beauchamp of IG in London.

"Most traders believe that the best course is to wait and see how the decision and press conference develop. Like the [Bank of England], the Fed is still highly divided, and in the absence of a strong caucus in favour of rate hikes, the current policy of 'steady as she goes' is the most likely winner."

What to watch for today? This, from senior economist Robert Kavcic of BMO Nesbitt Burns:

"The economic and rate projections will garner a fair amount of attention. Look for a hefty haircut to the 2014 growth outlook to around 2.25 per cent from near 3 per cent previously, largely because of the rough start to the year … The 2015 growth projection should hold firm at just above 3 per cent, unless the Fed believes the economy has lost momentum. The interest rate projections should confirm that most policy makers expect an initial tightening in 2015, with the majority seeing the Fed funds rate at 1 per cent by late next year and just over 2 per cent in late 2016."

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