London is facing challenges on multiple fronts to its centuries-old status as the place where the world trades gold. Two U.S.-based exchanges, CME Group Inc. and Intercontinental Exchange Inc., have created new ways of buying and selling precious metals. So has the London Metal Exchange. Trade volume in New York is rising, and China, where most of the metal ends up, is giving investors new ways to bet on gold’s price. All of this is a threat to London’s over-the-counter market, historically the leading player in global trade of bullion.
1. How did London become the center of gold trading?
It’s been that way since Moses Mocatta moved to London from Amsterdam and then, in 1676, partnered with the East India Co. to ship gold to India. The Bank of England, established in 1694, became a central player in the gold trade, and refineries sprang up nearby in London’s financial district. London’s workday, which overlaps that of New York and Hong Kong, is a plus, as is the U.K.’s long history of respecting property rights. Gold trading remained largely unchanged through centuries: Deals are still often struck on a virtual handshake.
2. How much trading are we talking about?
That’s hard to know. The vast majority of gold trading in London takes place off-exchange, in deals struck directly between buyer and seller -- each taking on the default risk of the other, without an intervening clearing house. What’s known is that cleared, reported trading in the city exceeded $6.2 trillion last year, according to research firm CPM Group.
3. Why is London at risk of losing its hold on gold?
The manipulation by some bankers of Libor -- the London interbank offered rate, long the benchmark for daily movements in interest rates -- raised questions about the integrity of all price-fixings by humans, including how bankers set the daily benchmark for gold in London. That led to greater scrutiny by regulators. New rules under the frameworks known as MiFID II and Basel III may make trading off-exchange more expensive, eroding the main advantage of London’s OTC market. Then along came Brexit, which has led some banks to announce they intend to move staff away from London, including from the currency desks where precious metals traders sometimes reside.
4. What threat does New York pose?
CME’s Comex in New York is the biggest futures market for gold -- and growing fast. In the three months that ended on Sept. 30, Comex saw record trading, with almost 20 million contracts changing hands. What Comex has going for it, in comparison with London’s OTC market, is transparency -- in volume, liquidity and pricing -- that comes from trading on an exchange and through a clearing house.
5. What threat does China pose?
China’s consumers are the world’s biggest buyers of gold, and -- unlike their peers in London and New York -- they like to take physical possession of the bullion they buy. The Shanghai Gold Exchange, which was formed 15 years ago in competition with London, has seen its volume grow. Since last year, it has set a daily price for gold, an attempt to establish a regional benchmark and enhance the impact of the yuan on pricing. Futures contracts can be found on the Shanghai Futures Exchange, and most recently, the Hong Kong Exchanges & Clearing Ltd. threw its hat into the ring by offering yuan-and dollar-denominated gold futures.
6. What other contenders are out there?
Gold trading on the Tokyo Commodity Exchange is in long-term decline. In India, where volume on the the Multi Commodity Exchange took a hit as rising stock prices lured investors away from precious metals, the government is said to be in talks to help the industry set up a new spot gold exchange. Singapore Exchange Ltd.’s wholesale kilobar contract, which began three years ago, remains moribund, with zero volumes this year as of September, despite efforts to revive it by extending trading hours and allowing easier verification.
7. How is London fighting back?
The London Bullion Market Association, which represents traders in the city, struck a deal with financial technology firm Boat Services Ltd. to create a trade reporting platform, which will allow the OTC market to remain compliant with regulations. Meanwhile, the World Gold Council, working with the London Metal Exchange and a group of banks, introduced a new system for trading gold and silver futures under the banner of LMEPrecious. Some of the biggest-trading banks have started testing a new bullion-trading platform created by Autilla Inc. in February. And CME and ICE have contracts to facilitate a shift to more transparent trading.
8. Is London fighting a losing battle?
No. Most of the banks’ trading desks are well represented in the city. More important, the float -- the giant stockpile of gold that underlies trading -- is heavily concentrated in the city. More than 7,000 tons of gold and 32,000 tons of silver, collectively worth almost $320 billion, are stored in hidden vaults managed by the Bank of England, JPMorgan Chase & Co., HSBC Holdings Plc, ICBC Standard Bank Plc and others, the LBMA said. And as long as the gold’s here, and the industry is willing to adapt to change, London will probably remain a force in the gold market.
The Reference Shelf
- A paper by the World Gold Council on liquidity in the global gold market.
- QuickTake explainers on gold’s ups and downs and on benchmarks and financial fiddling.
- Bloomberg’s overview of the fight for London’s gold business.
- A timeline on how London’s gold market evolved.
- A 2011 assessment commissioned by the London Bullion Market Association on the scope of the city’s trading.
— With assistance by Nicholas Larkin, Silla Brush, and Susanne Barton