The Strategist

Will London lose the gold trading market?

10/16/2017 - 12:14

London is facing difficulties with its centuries-old status as a place where the world trades in gold, writes Bloomberg.

Peter Trimming
Peter Trimming
Two US exchanges, CME Group Inc. and Intercontinental Exchange Inc., have discovered new ways of buying and selling precious metals. The volume of trading in New York is growing, and China, which is the world's largest consumer of gold, offers new ways to bet on the metal’s price.

All this represents a threat to the London OTC market, the leading player in the world trade in gold.

Why does London risk losing its status in the gold market?

Some bankers used to manipulate the London Interbank Offering Rate (LIBOR), which for a long time was the standard for daily interest rate changes. This fact raised questions about fixing prices, including how bankers set a daily benchmark for gold in London. This led to increased control by regulators.

The new rules, known as MiFID II (the provisions of the revised EU directive on financial instruments markets) and Basel III, can make over-the-counter trade more expensive, which, in turn, will undermine the main advantage of the London OTC market.

In addition, there is Brexit, which prompted some banks to announce that they intend to transfer personnel from London to other cities.

Is New York a threat?

Comex Exchange in New York is the largest market for gold futures, and at the same time it is fast-growing. In July-September, a record trading volume was fixed on Comex: deals were made with almost 20 million contracts. Comex strives for transparency - in volumes, liquidity and pricing, which comes from trading on the exchange and through clearing organizations.

And China?

Chinese consumers are the world's largest buyers of gold. Unlike consumers in London and New York, they prefer physical possession of purchased bars. The Shanghai Gold Exchange, which was founded 15 years ago, is seeing an increase in trading volume. Since last year, it has been setting quotes for gold, trying to create a regional benchmark and strengthen the yuan's influence on pricing. Futures contracts can be found on the Shanghai Futures Exchange, and more recently Hong Kong Exchanges & Clearing Ltd. offered futures for gold in yuan and dollars.

Other competitors

Gold trading on the Tokyo Commodity Exchange is demonstrating a long-term decline.

In India, the volume of trading on the Multinational Exchange suffered losses, as the rise in stock prices led to a decrease in investors' demand for precious metals.

What is London doing?

The London Bullion Market Association (LBMA) has entered into a deal with financial and technology company Boat Services Ltd. to create a trading reporting platform that will allow the OTC market to comply with regulatory requirements. Meanwhile, the World Gold Council, working with the London Metal Exchange (LME) and a group of banks, has introduced a new trading system for futures for gold and silver, called LMEPrecious. Some of the largest banks have started testing a new bullion trading platform, created by Autilla Inc. in February.

What are the prospects for London?

Most of the banks' trade operations are well represented in the city. More importantly, the huge gold reserves that underlie trade are largely concentrated in the city. More than 7 thousand tons of gold and 32 thousand tons of silver worth more than $ 19 billion are stored in hidden storages managed by the Bank of England, JPMorgan Chase & Co., HSBC Holdings Plc, ICBC Standard Bank Plc and others. And while gold is in this city, and the industry is ready to adapt to the changes, London is likely to remain a strong player in the gold market.