5 London Bankers Meet Daily in Secrecy, Set World Gold Price

Twice every working day, in a modern ritual, five bankers gather in a London board room and close the doors. Then they decide the world price of gold.

Few meetings are watched more avidly. Few are surrounded by such an aura of mystery.

Within minutes, the decision the five bankers reach is flashed around the world, affecting such varied matters as a dental bill in Kansas, the health of the South African economy, the value of a Pakistani bride’s dowry and the treasury reserves of major industrial nations.

The price of gold has not always been followed so closely. Historically, it was gold’s rock-solid stability that made it the ultimate insurance policy in times of trouble.

But in the 18 years since the United States abandoned the effort to maintain gold at $35 an ounce, price fluctuations have created a wave of speculators. Their activity has spurred trading volume and altered the fundamental character of the world’s gold markets.

Gold was not traded on the New York Commodities Exchange until 1975, yet last year delivery contracts worth more than $300 billion changed hands there. “The essence of being in gold now is making money, not protecting what you’ve got,” Timothy Green, a consultant and author of “The New World of Gold,” said the other day. “It’s a complete role reversal.”

Still, the volatility of gold prices has done little to tarnish the precious metal’s position as a favored medium of exchange and hedge against bad times. At the end of 1985, the central banks of non-Communist countries held about $385 billion in gold.

On a lesser scale, gold jewelry continues to be a vital factor in the security of families in much of the world. Increased demand for gold jewelry for brides in India and Pakistan has in the past few years helped revive traditional smuggling routes out of the Arabian Gulf ports of Dubai and Muscat.

“Governments and currencies come and go, but gold always remains,” said Thomas Butler, manager of gold dealing for Samuel Montagu & Co., an established London bullion dealer.

Some authorities explain differing consumer tastes in gold as an indicator of political stability. For example, in the United States and Britain, which have been spared the ravages of invasion and recent economic chaos, gold jewelry is viewed as largely ornamental. This is reflected in relatively lenient government standards that permit metal of 9 and 10 carats--about 40% pure--to be sold as gold.

In continental European countries historically exposed to greater political turmoil, minimum standards vary between 14 and 18 carats, while in most of the Third World, gold is usually sold at 21 or 22 carats--about 90% pure.

Secondary Markets

In the Middle East and South Asia, active secondary markets exist for such jewelry and prices are closely linked to the price of gold bullion.

The price of gold has become virtually a barometer of worry. It peaked in January, 1980--after dramatic oil price increases threatened national economies and the Soviet invasion of Afghanistan exacerbated relations between the superpowers. When the fear eased, so did the price of gold.

This year, purchases by the Japanese government of nearly half the world’s annual production has helped strengthen gold prices. The Japanese used the gold for 15 million coins commemorating Emperor Hirohito’s 60th anniversary on the throne.

Traditional gold bullion dealing on behalf of central banks, institutional investors and major gold users is still the cornerstone of trading in the metal, but big-time speculators have shown that they, too, can influence the price.

An Arab banker named Abdul Wahad Galadari, operating from Dubai, is said to have amassed huge gold delivery contracts in 1982, hoping that the price would drop and he could meet his obligations with cheaper gold. Instead, the price jumped, and when his credit ran out he was forced to sell his holdings in 10 frantic days, reportedly losing $100 million and buffeting prices in the process.

Last month, a report circulated that an Egyptian company had lost a similar amount in a similar speculative exercise.

Interest in ‘The Fix’

These new pressures and their impact on the price have intensified interest in the twice-daily London meetings that set the price, known simply as “the fix.”

From large brokerage houses in New York, Hong Kong and Sydney to the bustling bazaars of Amman, Riyadh and Kuwait, traders receive the London price almost immediately--by telephone, by news agency printer or by video display service.

“The character of the market has changed, but the fix remains a benchmark for everyone,” consultant Green said. “It’s clear and available and if you trade at it, there are no arguments you got a lousy price.”

The importance of the fix was acknowledged earlier this year when the U.S. Treasury decided to use it to price its recently issued American Eagle coin.

The fact that such a vital index is set by just five men is, to say the least, unique. In many ways, this ritual--some call it a ceremony--reflects the clubby, secretive core of the gold market that persists despite the broadening of participation in recent years.

The origins of the fixing go back nearly 70 years, when South African mining companies, then as now dominant among the world’s producers, decided to seek a better price than the longstanding Bank of England offer, which was equivalent to about $14 an ounce.

They offered a London bank, N. M. Rothschild & Son Ltd., a monopoly in marketing their production, but the bank quickly found itself stretched by the volume and called in four competitors known to deal in gold bullion. Together, representatives of the five banks met at Rothschild headquarters, surveyed their customers’ needs, looked at available supplies, found a price that balanced buyers with sellers and posted the first fix: the equivalent of $20.67 an ounce.

That was in September, 1919.

Still Done Same Way

Last week, the ritual was carried out at Rothschild headquarters in virtually the same way, and the price fixed was just under $400 an ounce. Present in addition to the Rothschild man were representatives of Mocatta & Goldsmid Ltd., Sharps, Pixley Ltd., Samuel Montagu & Co. Ltd., and Johnson Matthey Bankers Ltd., now using the name Mase Westpac Ltd., which acquired Johnson Matthey last year.

The fix reflects a role London has played for generations as a focal point of the world’s gold business.

French imperial riches were shipped here after the revolution of 1789. In the 1850s, gold from California and Australia launched several London merchants into the gold bullion business. South African gold has kept up the momentum.

Its convenient location between the American and Far East time zones and the presence of the world’s largest foreign exchange market have made London the epicenter of what is now a rolling, 24-hour market.

Twice a day, this global market pauses for the London fix. Requests to observe the ceremony are met with incredulity.

“Why should it be public?” Butler, the bullion dealer, asked, obviously surprised at the thought.

It is a question that covers many aspects of gold trading. With rare exceptions, neither buyer nor seller is identified, nor is the volume traded made public.

“It’s the nature of gold,” said Keith Smith, managing director of Mocatta & Goldsmid, London’s oldest bullion dealer. “A customer such as a central bank requires transactions to be secret. One of our main sales pitches is that if you do business with us, no one will ever know.”

Discretion Is Needed

There is little argument that discretion is needed to prevent large central bank transactions from triggering panic dealings, but such secrecy also offers a convenient cover for laundering illegal money.

In recent years, it is believed that significant amounts of cash from the Latin American drug trade have been laundered through bullion.

“In the 1980s, drug money has come into gold,” Green said, “but probably in the hundreds of millions of dollars rather than billions.”

To handle the rapidly expanding gold business, the London market has grown from about seven dealers in the early 1970S to 58 today, including major American firms such as Morgan Guaranty and Shearson Lehman.

The presense of such institutions has increased the pressure to democratize the London market, run now as it has been for much of the past century as an exclusive club by the five Establishment bullion dealers.

The Bank of England is currently developing proposals that would formalize and broaden the market, but there is little likelihood that these changes will affect the fix.

Even London-based dealers who take no part in the fix agree that the process is too important to alter.

“It’s simple, it works and it’s acceptable,” said Robert Guy, the Rothschild executive who has presided over the fix since 1974. Moreover, he said, “the clients like it the way it is.”