LONDON GOLD PRICE FIXING

In London, in days gone by, a Rothschild bullion broker trekked every day around the offices of the other gold dealers offering South African gold for sale. But as the volume of gold from South Africa increased it was easier to invite the dealers into the offices of Rothschild's to fix the price of gold. Hence, since 12 September 1929, 4 men walk up the steps of the Rothschild offices in St. Swithin's Lane, London, at 10.30 a.m. each weekday morning. They join the manager of Rothschild's bullion and foreign exchange department in the gold fixing room on the 1st floor. This large room with its green carpet and chairs and an ancient pendulum clock has walls adorned with portraits of Francis I of Austria, Frederick William III of Prussia and Empress Alexandra of Persia, together with those of other European monarchs for whom the Rothschilds negotiated loans in the early nineteenth century. The Rothschild's man sits at one end of a long table with his calculating machine in front of him. The other dealers sit at individual desks around the walls. Each desk has a telephone connected directly to the dealer's own trading room and a union jack. The flag enables a dealer to stop the meeting at any point with a cry of "flag up" while he confers with his trading room, which in turn is in direct communication with perhaps a dozen clients scattered across Europe. Once he has reached a decision with them, he lowers the flag and fixing proceeds.

The Rothschild's man opens proceedings by suggesting, "Gentlemen, we will start at 292 shillings and five pence." He will have arrived at that price following 30 minutes of telephone calls to the Bank of England and a host of other people, mainly in Switzerland, to establish the demand for gold. At the fixing all prices are quoted in sterling even though nearly all gold business is handled in dollars nowadays. Therefore the dollar rate is determined in advance as all sterling traded at fixing is sold for dollars straightaway afterwards.

Each trader relays the proposed starting price back to his trading room and thence to clients. The Rothschild's trading room also goes to the Bank of England. And it is the Bank which really holds all the cards. It is there in four capacities, darting "into and out of the ring donning four hats with the jerky animation of a hero in an early two reeler," as the Economist once put it. First, the Bank is buying and selling for Britain's own Exchange Equilization Account; second, they are, of course, the agents for South Africa, the largest single regular seller of gold in the world; thirdly, they operate the gold pool consisting of themselves, the central banks of Belgium, Italy, The Netherlands, Switzerland and West Germany and the Federal Reserve Bank of New York; finally the Bank aims to exert an overall moderating influence on the market to avoid violent fluctuations of price. The Bank of England is generally the only seller of gold because the other dealers can usually offset any selling orders against their own buying orders before fixing.

Once the opening price has been made known, each dealer indicates if he is a seller or buyer or has no interest. A seller specifies how many "good delivery" bars he is offering. A buyer merely states the fact and does not specify how much gold he needs. If no seller appears at the opening price, basically meaning that the Bank of England as the prime seller wants a higher price, then it is moved upwards in units of a farthing until the Bank or someone else offers gold. Similarly if there are no buyers at the opening figure the price moves down. Once both buyers and sellers have appeared the Rothschild man says "figures, please," and the buyers speak up, perhaps "Mocatta 60 bars," "Sharp 40," "Montague 40." Then, provided there is enough gold for sale to meet that total demand, the price is fixed for the day.

Since 1919, a lot of prestige and at the same time mystery has been associated with the 5 men with their flags and telephones in the fixing room. In fact, the crucial decisions are made in the trading room and relayed to fixing.