London's $5 Trillion Gold Hub Getting Ready for a Major Overhaulby
London bullion dealers pitch new trade platform and reporting
Mining group pairs with LME on plan to create futures contract
There’s a competition brewing to figure out how the world’s largest gold-trading hub can get bigger and better.
Much of the $5 trillion in transactions cleared every year in London is done by telephone or in electronic chat rooms and are the same kind of one-on-one deals that gave birth to the marketplace three centuries ago. But traders and bankers say the system may not provide enough transparency to satisfy regulators or attract new business at a time when more gold is being bought and sold in New York and Shanghai.
That’s why the main participant group, the London Bullion Market Association, is evaluating bids to create a trading and reporting platform. At the same time, a different plan is being developed by the World Gold Council, a mining industry group that is working with the London Metal Exchange to come up with new futures contracts, said two people with direct knowledge of the venture. The proposals, if successful, would alter the way gold is bought and sold in the city.
“It’s a pretty big moment for London, and it’s time to choose,” said Mark O’Byrne, a director in Dublin at brokerage GoldCore Ltd. “Everybody wants to bring more players to the table, but there is a risk that through the failure to work together, liquidity is diluted and the market weakened.”
At stake is the largest market for spot and forward contracts, with 4.62 billion ounces cleared among London market makers last year that amounted to almost half of such transactions globally, commodity researcher CPM Group estimates. And the metal is seeing renewed popularity with investors who have added to holdings of the metal after three straight years of losses.
Prices rallied 16 percent this year through March, the biggest quarterly gain in almost three decades. Metal for immediate delivery traded at $1,239.91 an ounce by 4:13 p.m. in London.
But gold, one of the world’s most-traded commodities and a reserve asset for most of the world’s central banks, has come under greater scrutiny. Markets lacking the transparency of traditional exchanges are getting more attention from regulators after banks were found to have conspired to rig a global benchmark for interest rates during the financial crisis. At the same time, London’s dominance is being challenged by other venues, with new pricing benchmarks for gold in Shanghai and expanded trading in New York.
The LBMA’s plans to modernize over-the-counter trading include the building of an online hub where trades between two parties -- without an intermediary exchange -- can be posted and stored in a database. This would allow for more in-depth trade reporting, something the LBMA says would allow for greater transparency, including the publication of a forward price curve.
The association hopes its proposal will affirm the size and liquidity of the market for gold, which may help convince regulators that the precious metal poses less risk for banks to hold than assets trading in smaller, less-liquid markets.
“Better transparency doesn’t only help satisfy the requirements of the regulators, but also those of the market,” LBMA Chief Executive Officer Ruth Crowell said in an interview in London. “It’s a search for efficiencies and market development that is driving change.”
All LBMA members would be required to report transactions. If not, they will lose the benefit of trading OTC gold without paying value-added tax, Crowell said.
A different tack is being taken by the World Gold Council, an organization funded by 18 mining companies with the aim of promoting the metal. It’s in exploratory talks with the LME and a group of banks to offer futures contracts for precious metals in London, two sources with direct knowledge said in January. The banks include ICBC Standard Bank Plc, Citigroup Inc., Morgan Stanley, Goldman Sachs Group Inc. and Societe Generale SA.
“An exchange-based, cleared market could have some immediate benefit for producers and hedgers like us,” said Brad Yates, head of trading for Dallas-based Elemetal LLC, one of the biggest U.S. refiners. “Price discovery is far easier and spreads are much tighter when the bids and offers are on the screen in front of you.”
Not everyone is convinced much will change. Ronan Manly, an analyst at BullionStar Pte Ltd., a Singapore-based dealer, said previous attempts to overhaul the market yielded disappointing results.
When the daily telephone conference call used to set the benchmark price for silver was replaced with a computerized system, participation remained low, Manly said. However, subsequent changes appear to have resolved those issues. The silver benchmark is hosted by CME Group Inc. and Thomson Reuters Corp. Bloomberg LP competes with Thomson Reuters in selling financial and legal information and trading systems, and posted a rival bid to host the silver pricing in 2014.
Still, veteran market participants are hopeful that the city will prevail as a well-established market in a time-zone overlapping New York and Shanghai.
“London is a very old gold market, but there is a lot of vibrancy and a lot of youth here,” said Ross Norman, who has spent more than 30 years in the industry and is now chief executive officer of retail bullion dealer Sharps Pixley, not far from Buckingham Palace. “The character of London has always been a human, interpersonal market based on trust, and I hope what emerges can retain that essential element.”