Gold Price and the Bank of England

By : Jack Wogan

The Bank of England acts as the banker of the Government and it sustains the consolidated Fund account of the Government. It looks after the foreign exchange and gold reserves of the country as well. In 1844, Bank Charter Act fixed the issue of bank notes with the gold reserves, giving the bank sole rights to the issue of banknotes. The Bank of England also acts as a bank of the bankers, which means it is also the last resort for borrowers.

The price of gold like all other commodities are determined by supply and demand. Although unlike other commodities, gold cannot be consumed, and all the gold that was mined previously still exists. In effect, this means more fluctuation, and that it can come on the market again to be sold when the price is right.

Central banks and the IMF play an important role in the price of gold. It is said that at the End of 2004, the central banks and official organisations held 19% of the total amount of gold that was mined. European central banks, such as the Bank of England, and the Swiss National Bank have been significant in the list of sellers of gold since 1999.

The London gold marketplace has a clearing mechanism, these are five banks that are interconnected. These are The Bank of Nova Scotia, Deutsche Bank AG, HSBC Bank, JP Morgan Chase Bank, and UBS. It is the job of the clearer, to take care of the gold that is shipped from all over the world. This gold will then go to jewellery manufacturers. Clearers also have customers who wish to buy the gold themselves.

In addition to the five clearers, the Bank of England clears total gold positions everyday by making transfers into unallocated accounts, in respect of the trading practices of each clearer. The Bank of England is not one of the five clearers, but is still the chief clearer for the LBMA. If they want to, they can generate supply by creating unallocated liabilities on their balance sheets, or they can create scarcity by buying gold back from the clearers, and reducing the bullion rate, in theory or reality, in market circulation.

A major concern about Over the Counter Trading is the gold fix. The gold fix is dictated by four major market makers. These are The Bank of Nova Scotia, Deutsche Bank AG, HSBC Bank USA London Branch, and Societe Generale.

This sets the price of gold at a fixed rate, which makes it possible for gold traders to trade at fair market prices. Twice a day, morning and afternoon, members of the gold fix in London conduct an auction. This auction aims at finding the price where the number of buying orders match with the number of selling orders.

This price is published widely in newspaper, and posted on the internet where guidance is provided to those who are in the buying or selling of gold at that very instant. This is a widely used method that is used by traders to fix the price of gold for physical gold transactions. Jack Wagon is a gold investment consultant. You can take his help to buy [http://www.goldmadesimple.com/]gold bullion.