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London - The London gold fix, the benchmark used by miners, jewellers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.

Unusual trading patterns around 3pm in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behaviour and should be investigated, Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.

“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which has not yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”

The paper is the first to raise the possibility that the five banks overseeing the century-old rate – Barclays, Deutsche Bank, Bank of Nova Scotia, HSBC Holdings and Société Générale – may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion (R215.7 trillion) gold market for signs of wrongdoing.

Officials at London Gold Market Fixing, the company owned by the banks that administer the rate, referred requests for comment to Société Générale, which holds the rotating chairmanship of the group. Officials at Barclays, Deutsche Bank, HSBC and Société Générale declined to comment on the report and the future of the benchmark.

Joe Konecny, a spokesman for Bank of Nova Scotia, did not respond to calls for comment.

Abrantes-Metz advises the EU and the International Organisation of Securities Commissions on financial benchmarks. Her 2008 paper “Libor Manipulation?” helped uncover the rigging of the London interbank offered rate (Libor), which has led financial firms including Barclays and UBS to be fined $6 billion in total. Metz heads credit policy research at ratings company Moody’s.

The rate-setting ritual dates back to 1919. Dealers in the early years met in a room in Rothschild’s office in the City of London and raised little Union Jacks to indicate interest. Now the fix is calculated twice a day on telephone conferences at 10.30am and 3pm London time. The calls usually last 10 minutes, although they can run for more than an hour.

Firms declare how many bars of gold they want to buy or sell at the spot price, based on orders from clients and themselves. The price is increased or reduced until the buy and sell amounts are within 50 bars, or about 620kg, of each other, at which point the fix is set.

Traders relay shifts in supply and demand to clients during the call and take fresh orders to buy or sell as the price changes, according to the London Gold Market Fixing website, where the results are published. The fixing process is unregulated and the five banks can trade gold and its derivatives throughout the call.

Bloomberg reported in November concerns among traders and economists that the fixing banks and their clients had an unfair advantage because information gleaned from the calls provided an insight into the future direction of prices, and banks could bet on spot and derivatives markets during the call.

Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to last year for sudden, unexplained moves that may indicate illegal behaviour. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves were not replicated during the morning call and had not happened before 2004.

Large price moves during the afternoon call were also overwhelmingly in the same direction – down. On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and last year. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.

There was no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said.

“This is a first attempt to uncover potentially manipulative behaviour and the results are concerning,” she said. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing.”

Deutsche Bank said last month that it would withdraw from the panels setting the gold and silver fixings. German financial markets regulator Bafin interviewed the bank’s employees as part of a probe into the potential manipulation of gold and silver prices.

The five banks that oversee the fixing set up a steering committee and would appoint external advisers to consider reforms before EU legislation on financial benchmarks’ regulation and oversight came into force. – Bloomberg