This Giant Metals Exchange Is Taking on the Gold Elite

  • LME to offer gold, silver contracts for first time in decades
  • Joint venture is backed by Goldman, Morgan Stanley, Natixis

LME to Offer Gold Contracts for the First Time in Decades

The world’s biggest industrial metals exchange is taking on the most powerful players in the gold market with the launch on Monday of its first futures contract for the commodity since the middle of the 1980s.

The London Metal Exchange and its partners aim to grab a piece of the action in a city where almost half the world’s gold changes hands. At stake are rival visions of how best to run the market, pitching the LME, Goldman Sachs Group Inc. and Morgan Stanley on one side and the London Bullion Market Association representing some of the biggest trading firms on the other.

Three years in the making, the gold contract, launched alongside another for silver, aims to draw investors from the off-exchange deals that currently dominate the city’s $5 trillion-a-year market.

“The gestation period has been longer than that of an elephant, but the baby is finally here,” Jeffrey Rhodes, founder of Rhodes Precious Metals Consultancy DMCC with more than 30 years in the industry, said from Dubai. “They’ve been coveting this for years and having waited so long, I think they’ll make it work.”

See also: a timeline on how London’s gold market evolved

The LME, World Gold Council -- representing miners -- and partner banks hope to capitalize on regulators’ push for more scrutiny by allowing investors to trade contracts on an exchange where transactions are tracked and risks managed. Their LMEprecious venture including Goldman, Morgan Stanley, Natixis SA, ICBC Standard Bank Plc, Societe Generale SA and OSTC Ltd. will centrally clear daily, monthly and quarterly futures contracts using LME Clear.

Needs Momentum

The group will need to overcome inertia among those wary of moving to a new venue for pricing precious metals. Adding to that, the bullion association, which represents firms trading in the market including HSBC Holdings Plc, JPMorgan Chase & Co. and UBS AG, is already revamping the current go-to system to improve over-the-counter transactions.

Ross Norman, chief executive officer of Sharps Pixley Ltd., a precious-metals dealer in London, plans to keep using the LBMA gold auction rather than any LME equivalent.

“I don’t think the market needs yet another trading venue, what we need is consolidation,” Norman said by phone. “I remain skeptical whether this will get the momentum it needs.”

Recent efforts to lure business to futures from Intercontinental Exchange Inc. and CME Group Inc. have had mixed results. CME’s contract, offering a spread between spot prices and benchmark U.S. futures, hasn’t traded since it landed in January, while Intercontinental’s has pulled in about 4 million ounces.

For a QuickTake on Gold’s Ups and Downs, click here

The LME’s new gold contract logged its first trades early on Monday, with 576 lots or 57,600 ounces exchanged by the afternoon. The silver contract, each for 5,000 ounces, garnered 16 lots. They follow the LME’s third-Wednesday date structure and will deliver into London’s unallocated, over-the-counter market, differentiating them from the LME’s normal physical delivery system. In New York, 19 million ounces of gold changed hands on Comex.

Wholesale trading on London’s OTC market is “largely constituted by a dozen or so banks,” said Robin Martin, a managing director for market structure at the World Gold Council. “An exchange-traded model creates a flatter market structure, whereby the full breadth of market participants can directly access the best price.”

The LME’s parent, Hong Kong Exchanges & Clearing Ltd., also launched a gold contract in the Chinese city on Monday. While the contracts in Hong Kong and London aren’t fungible, the simultaneous start is expected to bring trading demand from across time zones to exchange-traded liquidity pools, said Lorraine Chan, a HKEX spokeswoman.

The London exchange’s venture partners say pressure from regulators to bring clarity to murky precious metals trading, along with reduced costs for investors will continue to generate interest in the contracts.

“We did a radical rethink of how to make the market work in the 21st century, in light of regulatory and cost pressures,” said Paul Walker, who in working with the World Gold Council until mid-2016 was instrumental in developing the new system. "What’s being delivered addresses all of that."

— With assistance by Benjamin Robertson, and Mark Burton

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