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How is the price of gold set?

Gold bars are stacked at a safe deposit room Image copyright Reuters

Barclays Bank has been fined £26m by UK regulators after one of its traders was discovered attempting to fix the price of gold.

The incident occurred in June 2012, the day after the bank was fined a record £290m for attempting to rig Libor.

The trader, who has been sacked, was fined £96,500 and banned from working in the financial industry

The incident offers an insight into the often complex and apparently secretive world of City commodities trading.

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How is the price of gold set?

The price of gold is set by referring to the Gold Fixing benchmark. That allows market participants to trade gold a single, quoted price.

Twice a day, a group of banks have a conference call to determine a price of gold that matches their clients' orders to buy and sell the metal.

When the banks agree a price, it is "fixed".

In June 2012, there were five banks involved on the call: HSBC, Deutsche Bank, Scotiabank, Société Générale and Barclays. Deutsche Bank subsequently left the panel.

What happens on the call?

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The banks agree to set a price for gold.

The final "USD Gold Fixing" is the price for one "troy ounce" of gold delivered in London in the form of gold bars, approximately 400 oz. each. A troy ounce is an old-fashioned unit of measurement that is equal to around 31 grams.

The banks take turns to act as chairman on the call.

The chairman suggests a price that is normally close to the prevailing market price for gold.

Each bank then says whether they have any interest to buy or sell.

The chairman then moves the price up or down in small increments. At each stage, the chairman asks the banks to say how many bars of gold they want to buy or sell.

That process continues until the banks can agree to trade. The idea is to use price as a tool to match supply and demand for the commodity.

At any time, a bank or one of its clients can change their declared interest to buy or sell. Banks can even pause the process while they reconsider their positions.

What happened on this occasion?

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On 28 June 2012, Daniel Plunkett, the director on the precious metals desk at Barclays, submitted orders to sell gold during the banks' afternoon call.

The FCA said this was done to skew the market's impression of demand for gold that day.

As a result, the price of gold was set lower than it might otherwise have been.

Why did this happen?

In short, to stop Barclays and Mr Plunkett losing money.

A year earlier, Barclays had entered into a financial contract with a client. An important part of the contract was linked to the price of gold.

Under the terms of that document, Barclays would have to pay $3.9m to its client if the price of gold was set above $1,558.96 on 28 June 2012.

If the price of gold was set below that threshold, Barclays would not need to make the payment.

Mr Plunkett knew the terms of that contract and would have benefited from the price being set below that barrier.

Did the plan work?

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Yes. The price of gold was set at $1,558.50. That was below the threshold and meant Barclays didn't need to pay money to its client, although it later compensated the customer in full.

What happened next?

Later that day, Mr Plunkett made an order to buy back the gold that he had sold earlier in the day.

The client asked Barclays what happened to the price of gold that day. When the bank followed up, Mr Plunkett did not mention his trading activity until several days later.

During subsequent investigations, the regulator said that Mr Plunkett "misled both Barclays and the FCA by providing an account of events that was untruthful".

What did the FCA say?

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The FCA said that Mr Plunkett put his interests above those of his client and was not helpful during inquiries. His actions could also have harmed the Gold Fixing benchmarks and financial markets.

The fact that this happened the day after the regulator fined Barclays £59.5m for attempting to manipulate the London Interbank Offered Rate (Libor) was an aggravating factor, the FCA said. Barclays was also fined $360m by US regulators over the same issue.

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