Gold Price: Why Changes to London Gold Fix Could Send Gold to $5,000

Could the Gold Price SkyrocketCould the Gold Price Skyrocket?

The gold price death spiral between 2011 and 2015 left a lot of analysts puzzled. Money poured out of precious metals and into stocks, driving gold prices into a deep slump.

Now, an overhaul at the London Gold Fix could help reverse the tide, drawing in institutional investors and sending gold prices to levels we’ve never seen before. (Source: “Century-Old London Gold Benchmark Fix Said to Face Overhaul,” Bloomberg, January 21, 2016.)

But before we get to that, let’s quickly review what happened between 2011 and 2015. Precious metals fell as a group during that time, but the gold price slump was particularly strange in light of economic uncertainty around the world.

Gold is supposed to be a safe haven for capital during moments of volatility, but its value kept falling through a sovereign debt crisis in Europe, a government shutdown in the U.S., and increasing strife in the Middle East. It didn’t make much sense.

We finally started to see gold prices edge up in the last two months. It’s possible that investors started to lose whatever faith they still had in the stock market, but that alone won’t send gold prices surging.

What’s needed is a catalyst, a spark that could ignite explosive gains for gold. There has to be some sort of shift in investor sentiment for gold buying to pick up, and I think we’ve just gotten a glimpse of what that catalyst could be: an overhaul of the London Gold Fix.

I know that sounds very dry and technical, which it kind of is, but I assure you it’s important. The London Gold Fix has been setting gold prices for nearly 100 years, starting from the end of World War I. It’s an opaque and somewhat shady process.

Every day around 10:30 a.m. and 3:00 p.m. five banks get together for a conference call. They are Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc, and Société Générale. These banks keep negotiating on behalf of buyers and sellers until they settle on a price that brings both sides within 620 kg of each other.

But here’s the problem: there is no oversight. There is no way of preventing or discouraging abuse in the system, nor does anyone stop these guys from trading on information they learn during those calls. This opacity has long prevented some institutional funds from buying more gold.

They find the lack of transparency disturbing.

I want to be clear that no one has accused these banks of doing anything wrong. In fact, they have voluntarily chosen to review the process and find a more transparent way of doing things. However, shining a light on the process could draw in institutional investors that traditionally shied away from holding large sums of gold.

I feel like the timing is just right. Gold has been on a tear ever since the Federal Reserve raised interest rates, surging more than 18% in just a few months. Contrast that with the opening weeks of 2016, when stock indices crashed around the world.

China’s epic meltdown has capital markets on high alert and central banks are turning bond yields negative. Under those circumstances, both safety and growth are in short supply. Gold and other precious metals could fill the void, but institutional investors need the guarantee of transparency. They didn’t have it until now.