Gold Price Fix

How the price of gold is fixed and the history of gold prices & currency.

How the price of gold is set.
The process for setting the price of gold is called 'Gold Fixing'. It is also referred to as the Gold Fix or London Gold Fixing since it is set on the London gold market by the five-member London Gold Pool. The object is to fix a price for settling contracts in the London gold bullion market and was first done in 1919 among the top five gold traders but the price so fixed in US dollars (USD), Pound sterling (GBP) and Euros (EUR) per troy ounce is now recognized informally throughout the world as the gold price benchmark.

The gold fix is done twice a day, AM and PM, at the Barclay's Bank today but until 2004, was done by the Rothschild organization in London. Bidding is begun by the chairman of the 5-member group with a 'try' price over the telephone and market members then say how much they are willing to buy or sell at that price. If the demand for gold at the time is greater than the supply, the price is adjusted upwards until demand and supply balance each other and vice versa. The price is fixed at this point. Sometimes, there may be no agreement on supply and demand and in those rare occasions, the chairman can fix the price at his discretion. The PM fix is usually considered the main reference price for the day that is used in gold transactions.

Other factors that influence gold price
It is estimated that all the gold ever mined totals 158,000 tons and though the price is fixed depending on supply and demand, it is possible that the supply at any time is this entire hoard of gold because theoretically it can be offered for sale. When compared to the amount of gold being produced every year, the price is therefore set mainly on sentiment at the time. If for example, a destabilizing financial and political situation like war leads dealers to feel that their currency assets may become worth less, a solid asset such as gold will increase in price. This happened during the Great Depression in 1930s to the extent that the American government made it illegal to own gold. The demand for gold will also increase if the returns on other investments like stocks and bonds become very low as happened during the stagflation years of the 1970s and and this led to an investment bubble in the price of gold and other precious metals like silver. Similar, though not as extreme, conditions have forced gold prices to reach a new, decades-long high.

The gold standard and Bretton Woods System
This was a commitment by participating countries to set the price of gold in their domestic currencies so that these currencies could be easily and freely converted to gold and vice versa. The Gold Standard Act of 1900 brought in the gold standard and it was ended in 1933 when President Roosevelt make it unlawful to own gold other than in the form of jewelry because people had lost faith in currency during the Great Depression. This was replaced by The Bretton Woods System of 1946 after World War Two which created a system of fixed rates that let governments sell their gold to the US. This system ended in 1971 when President Nixon ended it, ending for the first time the link between currencies and commodities. Today, we use the system of 'fiat money' which says that currency is intrinsically worth only the paper it is printed on is is used only as a medium of exchange for the supply and demand of goods and services in an economy, including precious metals like gold and silver, with the value of money allowed to fluctuate based on market forces.