LBMA Gold Price benchmark ignoring market conditions, short-changing investors


by Ronan Manly, BullionStar:

As the gaping spread between London (LBMA) spot gold prices and front-month COMEX gold futures prices persists for a sixth week triggered by the bullion bank EFP liquidity blow up on Monday 23 March 2020, one unappreciated aspect of this gold price discovery scandal is that daily London LBMA Gold Price auctions are deliberately ignoring COMEX gold prices when setting the Opening Price (starting price) in the twice daily gold price auction.

Ignoring the Obvious

By ignoring the much higher COMEX gold futures prices while setting the LBMA gold auction starting price, the auction administrator IBA is ignoring current market conditions in the gold market (note – a stated methodology of the auction is to use current market conditions). The LBMA Gold Price auction is thus short-changing global gold market participants and investors who all use the LBMA Gold Price benchmark (the final price from the auction) as a critical reference rate. Their motivation? To take the spotlight off the fact that the London spot gold market is broken and that the LBMA market makers have liquidity problems.

However, such is the importance of the LBMA Gold Price benchmark that it is a regulated commodity benchmark under European Benchmark Regulation (BMR), including Annex II of the BMR. Prior to BMR, the LBMA Gold Price was a benchmark regulated by the UK Financial Conduct Authority (FCA).

In short, the LBMA Gold Price benchmark is used all throughout the gold market to value everything from gold-backed Exchange Traded Funds (such as the SPDR Gold Trust GLD) to ISDA Commodity Definitions (e.g. ISDA swaps), and from OTC structured product valuations to central bank gold lending agreements. The LBMA Gold Price benchmark is also used to value mining contracts, refining contracts and by thousands of other precious metals market participants, such as wholesalers and bullion retailers to value their own bi-lateral transactions.

By failing to take into account current market conditions in the gold market, the LBMA Gold Price is not only short-changing investors who rely on the benchmark, but as a regulated benchmark, it’s operation is in breach of European Benchmark Regulations as not being a representative benchmark, and IBA is in breach of not explaining to the public how the LBMA Gold Price methodology works (see below).

As a reminder, since 23 March 2020, there has been a persist and unprecedented large spread between the active month COMEX gold futures and the London spot gold price, with COMEX gold prices trading far higher than the London spot gold price. In actuality, it is the London spot gold price which is trading at a discount to the COMEX gold prices. See chart below.

COMEX gold futures prices are determined by trading in the CME’s GC100 exchange traded 100 oz gold futures contract. London spot gold prices are determined by trading of unallocated gold in a market made by bullion bank market making members of the London Bullion Market Association (LBMA) such as JP Morgan, HSBC, UBS and Goldman Sachs.

Divergence between COMEX gold prices and London gold spot price since 23 March 2020. Source: 

At times during the last 6 weeks, the COMEX front-month gold futures contract has been trading at nearly $100 above the spot price, and regularly at more than $25-40 above the spot price (e.g. 24 March, 26 March, 29 March, 6 April, 9 April, 13 April, 14 April, 16 April, 23 April, 24 April). For granularity, see interactive chart here:

For example, on 14 April when the LBMA GOLD Price afternoon auction was being conducted, the front-month COMEX gold futures price was trading at more than US $1762, yet the opening price of the LBMA Gold Price auction (the price of Round 1) was input by IBA at US $1737.30, a $25 difference on the low side.

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