Finance titans face off over $5t London gold market
london — Some of the biggest names in finance are fighting for control of the London gold market — a $5 trillion, three-century-old trading hub that is being forced to adapt to a digital age.
As the London Bullion Market Association (LBMA) revamps over-thecounter trades that are the market’s major pricing benchmark, new ways of buying and selling precious metals are set to start next year from CME Group, Intercontinental Exchange and the London Metal Exchange (LME). Some big banks have stakes in the outcome, including Goldman Sachs Group, HSBC Holdings and JPMorgan Chase and Co.
Almost half the world’s known gold trading occurs in London. OTC transactions are sealed by virtual handshakes, leaving default risk with buyers and sellers rather than relying on clearinghouses, which use collateral to manage and offset risk. But since the financial crisis, all markets have been reevaluating how they do business and manage risk as regulators step up scrutiny.
A push for fewer risks and more disclosure has forced the LBMA to seek changes that would make it more transparent and secure for customers. The association will introduce trade reporting for its members and a new trading platform in the first half of next year. That’s also when competitors plan to unveil new precious-metals derivatives built around the clearinghouse models.
Gold remains one of the world’s most-popular commodities and a core reserve for central banks around the world. While prices slumped for three straight years through 2015, demand has since rebounded. Holdings by exchangetraded funds are up 30 per cent this year, and investors have poured a net $25.5 billion into precious metals funds, data compiled by Bloomberg show.
That’s helped boost the business of buying and selling gold. In October, LBMA reported gold trading rose to a daily average of 18.6 million ounces. That’s about $23.5 billion. Prices are up 9.4 per cent this year at $1,160.30 an ounce as of Wednesday.
The LME, the world’s largest base-metals exchange, found so much promise in precious metals that it announced in August plans to start offering cleared gold and silver contracts in the first half of 2017. Eventually, it will add platinum and palladium. The exchange had the backing of a group of five banks including Goldman Sachs, ICBC Standard Bank and Societe Generale, as well as the World Gold Council, a group backed by the mining industry that seeks to develop markets for the metal.
ICE, which owns commodity and financial exchanges, already runs the daily London gold auction on behalf of the LBMA among 13 authorised participants who set the daily price. In October, the Atlanta-based company said it would start its own gold contract in February that would involve bullion held in London and traded on its New York exchange.
Chicago-based CME Group, owner of the Chicago Board of Trade and the world’s largest futures exchange operator, sought an even earlier entree into the London marketplace. In November, during LME Week, CME said it would start London gold and silver contracts on January 9 that offer a spread between spot prices and benchmark US futures. — Bloomberg