You may be watching the fluctuating gold prices, wondering to yourself “how do those bigwigs at the LBMA come up with this stuff?” In this post, we’ll go over the basic factors of supply and demand that influence the gold fixing process.
To start, the chairman of the fixing sets the opening price for gold, which is at or near the current spot price of gold. The rest of the members then begin trading simulations for gold orders on the behalf of their interests and those of their clients. These gold orders are defined by limits (e.g. buy up gold, but only if it costs less than $X, or sell gold, but only if you can get more than $X per ounce). The objective is to find a balance of buying and selling.
After trading simulations are run, fixing members declare whether they have a net buying or selling interest, or neither. If, for example, the amount of gold the members propose to buy is higher than what they propose to sell, the chairman raises the price. This moves the price of gold to a favorable balance for two reasons. First, the number of buy-orders will decrease if the price increases. Second, the number of sell-orders will increase for the same reason.
This process continues until supply and demand meet (or the imbalance is 50 good-delivery bars of gold or less), then the price is fixed. Of course, there are more complexities when it comes to the trading simulations, pausing the proceedings, and pro rata deals between individual members. But, the core of the process is to find the balance between supply and demand.
