is the rothchilds pullout a warning of things to c, page-5

Rothschild's exit leaves London's Midas touch up for grabs
April 18, 2004
By Sherilee Bridge

Johannesburg - South African bankers may have developed a taste for the English banking fraternity's pinstriped suits but they are not as keen to tie themselves down to the antiquated ritual of fixing the gold price twice daily.

Homegrown banking group Investec was one of the names that kept cropping up as a possible replacement for a vacant seat on the gold-fixing committee in London following this week's shock announcement by NM Rothschild that it was exiting the gold business after 200 years.

Paul Plewnan at Investec's commodities desk in London questions the value of becoming a member of the committee.

Investec and the other rumoured contender, Barclays, were understood to have lost their bids to Societe Generale when they made a play for a committee seat two years ago after Credit Suisse First Boston pulled out of gold trading.

"We weren't interested in buying a fixing seat and we are not looking at it at the moment," says Plewnan.

"Besides who can afford to take at least two hours out of a broker day to attend the fixing meetings somewhere else in town," he asks.

One of the oldest rituals in the City of London, the 10.30am and 3pm gold-fix meetings have been taking place in a plush chamber on the third floor of Rothschild's office in St Swithin's Lane for the past 85 years.

According to the BBC, what has become the bizarre tradition associated with setting a benchmark price for trading in gold each day was established after World War 1.

Rothschild, founded by the family that supplied gold to the Duke of Wellington to finance his campaigns against Napoleon, chaired the meetings from the start.

The twice-daily meetings are attended by the five member banks - Rothschild, Deutsche Bank, HSBC, Canada's Scotia Bank and Societe Generale - which are charged by the London Gold Market to agree to a price for the bullion on offer.

Seated at desks equipped with a phone and a mini Union Jack, haggling can take up to two hours but is usually over in a matter of minutes.

During the fixes, telephone lines are kept open to trading rooms where dealers are in touch with customers.

Once the price is right and buyers are matched with sellers, and all the flags are lowered, the price is fixed.

"While the whole process harks to a bygone age, the economics of the modern gold market are far less quaint," the BBC said.

The harsh reality is that with hedging falling out of favour with gold producers wanting full exposure to the strong gold price, a large chunk of trade has been wiped off the tables.

Rothschild's gold business generated just 2.2 percent of the bank's income last year, down from more than 8 percent five years earlier.

David de Rothschild, the chairman of Rothschild, says: "It is clear that the revenues we have generated from commodities - in comparison with those from investment banking, [corporate] banking and those we think we can generate from private banking - have definitely declined."

The firm has yet to decide whether to sell or close its commodities business, which employs 40 people.

Rothschild says discussions are being held with members of the committee "to ensure an orderly handover of the chairmanship".

It would continue to chair the fixing for as long as necessary.

It has been suggested that the chairmanship is likely to be rotated between member banks in future.

Industry sources have also predicted that the meetings would be replaced by telephone fixing.