History of the Currency and Gold Fix
The first formal Currency Fix in the modern day began in conjunction with the advent of not only the London Bullion Markets Association but the Gold Fix in 1919. The concurrence of both fixes would form not only the foundation to modern day markets but the 96 year tradition continues each and everyday as markets trade because the Fixes offer market reference prices. Gold is Fixed today twice daily at 6:30 am and 11:00 A.M.. . New York time in Euros, British Pounds and US dollars. The Gold Fix in each currency offers, past and present, a reference price, a trade able market rate, a basis to price other assets and market instruments and offers a means to finance world trade. More importantly, Fix prices in Gold, currency or both offers stability in markets but also offers the same trade able market rate to price other assets, to finance positions and world trade. But Gold is not the only Fix since the LBMA Fixes Silver, Platinum and Palladium.
Throughout history, the currency Fix is a price that shared either a dual relationship in relation to Gold and Silver or an adverse alliance as currency prices free floated. In Gold and Silver standard periods as was the prevailing market practice in the UK empire and Europe from the 1700’s – 1850’s, currencies were priced and remains the tradition today as GOLD/Currency ( UK ) or Silver/Currency ( Europe). When massive piles of Gold was found in Brazil in the early 1700’s and Australia, California and South Africa in the 1850’s and 1860’s, all nations shipped the Gold to the faults at the Bank of England and later processed by newly created Gold refineries. Not only was the Bank of England the conduit to Gold sales to banks but they ensured only the best Gold bars would be accepted in the market. A total of five companies would dominate but also manage the Gold Fix from 1919 to 2004 when Barclays bought the seat due to a sale by one of the founding firms. Domination of the five companies in earlier years would come to be known as the Cartel, Cartels, London Cartel. As the Bank of England relieved themselves of the Gold responsibility, the London Buillion Markets Association was formed in 1987.The Gold Fix was born but a birth that maintained a fixed exchange rate organization due from Gold Standard Systems.
If a Gold Standard system is understood as a regulation of not only Fixed exchange rates in relation to Gold for any domestic currency and subsequent currency exchanges then Gold Standards is also the regulation of a fixed price level and money supply system for any nation. The system maintained economic stability from the 1880’s to WW1 in 1914. The United States fixed Gold in US Dollars at 20.67 in 1834, formally adopted Gold as a standard by the Gold Standard Act of 1900 and raised the Fix price to $35 per ounce in 1933. The UK Fixed Gold at 3.17 oer ounce. WW1 saw a breakdown of the system particularly as it related to trade from the US and UK perspectives.
Both the US and the UK experienced trade deficits or an outflow of Gold as their Gold reserves were exchanged for currencies. This caused the UK to suspend the Gold Standard from 1914 – 1925 and a permanent suspension in 1931. Many nations were affected due because of the Pegged exchange rate many shared with GBP. South Africa, Canada, New Zealand, Egypt, India, Australia are the few notables including Japan when the Bank of Japan Fixed JPY to GBP/JPY from the 1920’s – 1930’s. All currencies except JPY was known formally throughout history as South Africa Pound, Canadian Pound, Australia, New Zealand and Egytian Pound. All were fixed to GBP. Egypt still retains its formal name as Egyptian Pound and was fixed to GBP at 0.975. The US maintained the largest stockpile of Gold so wasn’t affected as badly as the UK.
While Gold still maintained the daily Fix from 1919, the currency breakdown was seen throughout the 1920’s as exchange rates on any given day experienced 500, 1000, 1500 and even 2000 pip daily price changes.The factor that caused such volatility was known as the :Par Exchange Rate”. If US Gold was Fixed at $20.67 per ounce and GBP at 3.17 or 10.5 per ounce then the Par Exchange Rate for GBP/USD was Fixed at 4.8379. If a currency such as AUD/USD at 1919 prices is offered then AUD/USD was priced at 2.3790 and its value at two times didn’t equate to 1 GBP. Further, AUD/GBP was quoted in 1919 prices at 0.4980 or 2.0090 GBP and far less than the stated Gold /GBP Fix at 3.17. AUD/GBP reached a 1920 high of 0.5235 or 1.9102 GBP’s. Enormous volatility occurred due to various Fix prices between and among currencies, price imbalances from the Fix and a demand vs supply issue when economic trade is factored into the equations.
Gold and Currencies share an alliance when the world standard is focused on economic stability to maintain fixed money supplies and price levels. All are fixed. But a new system emerged particularly, because the Gold Fix was suspended from 1939 – 1954, where currencies were pegged to each other or Pegged to a reserve currency. The US Dollar was the preeminemt Peg for most nations, GBP secondary. This new system began in the 1930’s as exchange rates barely saw a 10 pip movement on any given day and formalized as the Bretton Woods system in 1944. A 1% Band plus or minus was instituted for exchange rate movements and held perfectly until the free float in 1971. Further, nations such as France and Germany left the Gold Standard in 1936 so assisted this new periodic change.
When currency prices free floated, Gold and Currency prices completely separated. The Gold Fix remained as the normal daily Gold Fix as XAU/USD, XAU/GBP and XAU/EUR and all traveled one way while currency prices traveled another way. The Gold Fix price became a market risk measure Vs its currency counterpart pairs. From an economic perspective, Gold and currencies separate when nations agree to inflate money supplies and allow the free float demand and supply of markets to determine its price.
The currency Fix price had to factor as a separate financial instrument so nations instituted either Banking Associations or central banks directly determined a daily Fix price for not only their own currencies but a whole slate of currencies pertinent to that particular nation in trade terms or by use of Trade Weight Indices for G10 nations. The New Zealand Central Bank for example Fixes 17 currencies as NZD/other currency. The European Banking Federation manages bid and ask Fix prices but allows the ECB to calculate and report Fix prices for 23 currencies as EUR/Other Currency. The RBI in India calculates its own exchange rates. The Financial Markets Department in the BOJ calculates and releases Fix prices for USD/JPY, EUR/USD and EUR/JPY. Every nation is different and most important is no two nations are the same.
Fix prices are released at different times each day. The EUR/USD for example is Fixed 10 times per 24 hour trading cycle and 11 times if the US close is factored. Luckily for the EUR, Kuala Lumpur and Singapore as well as Jakarta and Bangkok are always Fixed together or two additional Fix prices would add to the list. Tokyo Fixes its currency prices after Japan market closes at 3 P.M.Tokyo to price its currencies in perfect time for European market openings at 7 A.M. Frankfurt or 2 A.M. New York. Seoul Fixes its currencies at 2 P.M. Seoul or 6 A.M Frankfurt but always before Tokyo so a daily battle ensues between Tokyo and Seoul to allow the respective Fix price to occur conducive to Tokyo or Seoul. Because Tokyo Fixes occur after Seoul, Tokyo always wins unless Tokyo is on holiday. Some nations win, others lose in the currency Fix price matrix due to times respective markets open and close, relationship to other nations and its geography in the market cycle.
What exist today as the Currency Fix is the result of not only a coordinated price that exist from central bank to central bank but hardly a deviance exist in the prices. The reason for cooperation is because Fix prices are set in small channels and it holds the currency price in small ranges from market to market. Its like the Bretton Woods 1% fluctuation band. If currency wars truly existed such as what occurred in the 1930’s to outright destroy another nation’s currency then central banks would fight harder for an acceptable price. Instead, cooperation exists, not collussion but cooperation since formulas to calculate Fix prices reveal small movements from market to market. The only manner to argue currency wars is if large price swings are seen market to market. The currency war would then become a true price war. More importantly, not until the 1980’s and the January 1986 introduction of Libor did the world realize that exchange rates must be viewed as an interest rate.
A Total of 10 currencies were fixed in London known then as British Bankers Association Libor. It was the world standard Fix price as the premiere trade able market rate. From Libor developed currency swaps, Forwards, options European and American, Barrier Options, renewed interest in Eurodollars, yield curves, bonds, ETF’s, Futures, repos, Commercial paper and pure interest rate instruments.The list of financial instruments that developed from the Fix comprises a whole host of instruments with an interest rate focus. Its quite the opposite to what the Gold Fix was about just a few years prior. But then markets began to develop the same instruments but for a longer term. Currency Forwards, Swaps, Eurodollars are viewed and traded 10 and 20 years out, Bonds and Yields for 30.
From the Libor Scandal, five nations refuse to participate in Libor any longer. Those currencies are CAD, SEK, DKK, AUD and NZD. While five nations remain due to importance of monetary policy to Libor such as USD, JPY, CHF, GBP and EUR. What central banks realized is currency Fixes facilitates easier by use of its own internal interest rates. Libor factored to the currency may experience 1000, 1500 or even 2000 pip ranges. By elimination of Libor, central banks manage exchange rates in shorter ranges. A pegged exchange rate to a small central parity band such as DKK eliminates the need for Libor. For central banks. its all about the management of exchange rates in relation to their own economic systems.
Many nations don’t participate in Libor such as India and most Asian nations because their markets are closed by the Libor Fix.Japan qualified itself long ago as its foray to Western markets when it participated in the Gold Fix and later pegged to GBP/JPY. The Japanese London connection remains strong and viable today. Due to lack of Libor participation, nations then relied on overnight rates as either a Libor replacement or as an exchange rate management tool to hold the exchange rate price in place while respective markets are closed. Again, its a time factor to consider. A nation such as CAD benefits from US markets because of the exact times both respective markets are open while other nations rely on the tools available. Focus on overnight rates began with introduction of the Euro as European nations turned from Libor to Eonia as their guiding overnight rate. Because world markets and nations in particular operate on cooperation and the copy cat syndrome, use and focus on overnight rates gew for all nations from Euro’s beginnings and flourished. As markets truly went global, banks employed overnight rates to remain competitive in other markets when their own markets were closed.
Today’s exchange rate focus in terms of the Fix price is the race to the bottom. The goal of every central bank is to lower interest and exchange rates and price levels to its lowest common denominator without exploding money supplies. Its a central bank management system and a goal that can’t be fought despite its deviation from fixed price levels, money supplies and exchange rates from prior periods. The success if seen will appear in rising Inflation levels later. Then exchange rates begin a race to the top.
The currency and Gold Fix price is a 96 year daily tradition and the heart of all markets and in all nations on every continent. If a nation has a currency, it has a Fix price. Its a tradition that will never leave markets nor will we see a diminution of its use. Fixes allow exchange rate stability and a basis for cross border economics to flourish as well for daily traders to participate in the currncy markets.
Published FX Trader Magazine
Brian Twomey, Inside the Currency Market, btwomey.com, twbrian.wordpress.com
Thank you LBMA to assist in historic information.