Fight Over Future of London’s $5 Trillion, 300 Year-Old Gold Market

The fight over the future of the global gold market, London’s 300 year old role in the market and the LBMA’s role in determining price makes Bloomberg’s lead article today and we contribute. The article begins:

“There’s a competition brewing to figure out how the world’s largest gold-trading hub can get bigger and better.”

Bloomberg

“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.”

Our primary concern has long been that the market becomes transparent and the fundamentals of physical supply and demand ultimately determine the price. At present, London Bullion Market Association or LBMA trading involves the buying and selling of unallocated gold contracts largely amongst bullion banks and other LBMA members.

LBMA

The LBMA offers “over-the-counter” (OTC) wholesale trading of unallocated gold between bullion banks and other members. Because of its importance to the global bullion trade, the LBMA has for many years overseen spot dealing in gold and silver for most of the world.

Gold traded by members of the London Bullion Market Association rarely, if ever, physically leave the vaults in which they are stored. The LBMA relies on paper transfers to denote gold trades, with physical bullion remaining in situ in unallocated accounts. Concern has been voiced in recent years that members may not have the gold they are trading and the market therefore may not reflect actual supply and demand on a daily basis or indeed over the longer term.

The LBMA points out on their website that

“In 2015, $20.7 billion (17.9 million ounces) of gold cleared daily through London.”

This equates to 556 metric tonnes (17.9 million ounces/ 32,150 troy ounces) of trading every single day. Meanwhile, annual global mining supply is just 3,000 metric tonnes. So in just one trading day, the LBMA is trading nearly 20% of the total global mining supply of gold for an entire year.

Queen Inspecting Gold Bullion in the Bank of England Vaults

In addition to a lack of transparency regarding what gold bullion is in the LBMA gold vaults and what bullion is being traded, there is also a lack of transparency as to who the buyers are and who the sellers are. This creates the real risk that the LBMA market and prices can be manipulated and does not reflect the real world fundamentals of actual global supply and demand – as a market should.

The full Bloomberg article can be read here

Gold Prices (LBMA)

7 April: USD 1,237.50, EUR 1,086.07 and GBP 879.70 per ounce

6 April: USD 1,225.75, EUR 1,079.76 and GBP 868.38 per ounce

5 April: USD 1,231.50, EUR 1,083.59 and GBP 866.32 per ounce

4 April: USD 1,215.00, EUR 1,068.80 and GBP 854.58 per ounce

1 April: USD 1,232.10, EUR 1,080.69 and GBP 860.20 per ounce

Silver Prices (LBMA)

7 April: USD 15.22, EUR 13.38 and GBP 10.81 per ounce

6 April: USD 15.07, EUR 13.28 and GBP 10.71 per ounce

5 April: USD 15.19, EUR 13.37 and GBP 10.69 per ounce

4 April: USD 15.58, EUR 13.92 and GBP 10.99 per ounce

1 April: USD 15.58, EUR 13.92 and GBP 10.99 per ounce