Fixation: Setting of a Present or Future Price of a Commodity

A detailed explanation of fixation, the process of setting present or future prices of commodities by assessing market forces.

Fixation refers to the process of determining a present or future price for a commodity. This price determination is based on assessing market forces such as supply and demand.

Types of Fixation

Spot Fixation

Spot fixation involves setting the price of a commodity for immediate delivery. This takes into account current market conditions and will often involve assessing current supply and demand levels.

Forward Fixation

Forward fixation, on the other hand, sets the price for a future date. This involves predicting future market conditions and is often used in futures contracts in commodities markets.

Fixation Process

Market Forces Assessment

The primary method of fixation involves assessing market forces, such as supply and demand. Participants in the market, such as traders, analysts, and brokers, analyze various market data and trends.

Price Discovery

After the assessment, the next phase is price discovery, where supply and demand curves intersect to determine the market equilibrium price. This is often facilitated by trading platforms and exchanges.

Gold Fixing in London

A prime example of a standardized fixation process is the gold fixing in London which happens twice each business day. Representatives from major banks participate in a conference call to set the gold price after an evaluation of market conditions.

Historical Context

Early Commodity Markets

Early commodity markets saw prices being set through bartering and direct negotiation. Formalized price setting mechanisms such as fixation emerged as markets became more complex.

The London Gold Fix

The London Gold Fixing started in 1919, aimed at providing a benchmark price for gold. It is a prime historical example and is still relevant today, evolving to incorporate modern trading technologies and wider participation to ensure transparency.

Applicability of Fixation

Commodities Trading

Fixation is extensively used in commodities trading for products like gold, oil, and agricultural products. It’s crucial for both buyers and sellers to have a clear price to transact.

Futures Markets

In futures markets, fixation helps in setting prices for contracts that will be executed in the future, aiding in hedging and risk management strategies.

Related Terms

• Open Outcry: A vocal auction process in commodities trading where prices are openly bid and offered in trading pits.
• Market Equilibrium: A state where the supply of a commodity matches its demand, leading to a stable price.
• Hedging: The use of financial instruments such as futures to offset potential losses from price fluctuations in commodities.

FAQs

Why is fixation important in commodity markets?

Fixation provides a transparent, reliable reference price that helps market participants make informed trading decisions.

How is the fixation price for gold determined?

The London Gold Fixing, for example, involves consultations among major banks to evaluate supply and demand and arrive at a consensus price.

What are the risks associated with forward fixation?

Forward fixation assumes future market conditions, which carry the inherent risk of unpredictability and can lead to financial losses if market conditions deviate from expectations.

References

1. “The London Gold Market Fixing,” London Bullion Market Association (LBMA).
2. “Introduction to Commodity Trading,” Commodity Futures Trading Commission (CFTC).
3. “Economics of Commodity Markets,” Cambridge University Press.

Summary

Fixation is a crucial process in commodities trading, providing stability and reference points in volatile markets. By understanding the basics, types, historical context, and related terms, market participants can better navigate and utilize this fundamental tool for setting commodity prices.