In a fix, Mr Bond

COMMODITY prices are not just for buyers and sellers of the physical stuff. They are also the basis of derivative markets—futures contracts, options, and combinations of these and other financial instruments—which can be far larger. A twitch in the “benchmark” price can mean big shifts in the value of derivatives, and profits for the prescient.

People unhappy with the way the world gold market works suspect that more than prescience may be involved. In a class-action lawsuit filed this week, Kevin Maher, a New York-based investor in the gold and derivative markets, is suing the five banks which set the benchmark—Deutsche, Barclays, Nova Scotia, Société Générale and HSBC—for collusion. Those banks that have commented say they will defend the suit vigorously.

Another bit of bad news for the gold market comes from a forthcoming paper by Rosa Abrantes-Metz, of New York University’s Stern School of Business, and her husband Albert Metz, a ratings-agency chief (writing in a personal capacity). This identifies a puzzling number of large downward price movements in the run-up to the afternoon “fix”: a conference call, typically ten minutes long, when the banks exchange information and decide on the price. Ms Abrantes-Metz terms the spikes “too frequent and too large” to be mere chance.

The couple have previously highlighted problems in other benchmarks, such as LIBOR (the London interbank offered rate). Ms Abrantes-Metz says it is “troubling” that a “small group of people” with “complete lack of oversight” set prices in which they have multiple other interests. The anomalous spikes were not noticeable in the period 2001-03, she notes, but became apparent only after 2004, when the gold-derivatives market expanded sharply.

Some participants are getting jittery. Deutsche Bank is withdrawing from the gold- (and silver-) fixing processes, putting its seat up for sale. The German financial regulator, BaFin, has interviewed members of the bank’s staff as part of a probe into potential market-rigging of both prices. Other financial supervisors around the world are investigating a range of commodity and interest-rate benchmarks. A hangover from an earlier, clubbier age (the London fix started in 1919), they were designed as a way of producing clear prices in illiquid markets. But to a suspicious modern eye, they look archaic and dodgy.

People who are involved in the gold market defend it robustly. Ross Norman, the chief executive of Sharps Pixley, a bullion broker, says that the methodology of the fix is “open, efficient and transparent” and known to regulators. He agrees that more visibility might help, but decries suggestions that the market could be rigged. Any systematic anomaly, he says, “would be grasped by dozens of institutions, who would make money on the arbitrage.”