The London Metal Exchange (LME) stopped offering contracts for the trade of gold futures back in 1985. It was a short-lived venture that didn’t attract much interest at the time. A similar scheme for 10,000-ounce silver contracts also died around the same time period.
After three decades, the important global gold platform in London is preparing to once again make gold spot contracts and gold futures contracts available for trade.
According to a joint statement from the LME and the World Gold Council (WGC), the new venture called LMEprecious is expected to launch next year and will introduce “centrally-cleared gold and silver contracts” sometime during the first half of 2017.
A group of banks and trading firms, presumably those active in the London Bullion Market Association (LBMA), will also be partners in the project.
In a statement, the LME and its partners explained that “[this] initiative has been driven by the need for greater market transparency, to support and aid ongoing regulatory change, provide additional robustness to the precious metals market, [and] broaden market access.”
The notion of greater transparency is an important one. (Lest we forget the Libor scandal or manipulation of the London gold fix?) Bear in mind that many multiples of the actual physical in loco gold supply trade in London every day because the London Bullion Market is arranged much like fractional reserve banking. 95% of the trading involved unallocated gold that changes hands on paper only, not unlike gold-backed ETFs.
To bring this point into focus: The statistics published by the LBMA indicate that more gold is traded in London each day than is mined across the globe each year; thus, nearly eight times as much gold as is known to man since the dawn of time is traded in London annually.
Obviously, this makes no sense. Transparency has never been the LME’s strong suit.
LME Maintaining Relevance
Really, the reintroduction of these paper gold contracts appears to be geared toward maintaining the relevance of London in the ever-growing global gold markets. Increasingly, London—the gold vault capital of the world—must compete with Shanghai for supremacy in the over-the-counter (OTC) gold trade.
WGC’s CEO Aram Shishmanian reiterated this focus on remaining relevant [emphasis mine]: “This is another important step in the modernization of the gold market. It will strengthen London’s position in the global gold market, enabling it to meet the needs of all participants, attract new players and satisfy the highest standards of regulatory compliance.”
So far, the market-making banks that signed on to participate in trading the new gold contracts on Day 1 were Goldman Sachs, ICBC Standard Bank (China), Morgan Stanley, Natixis, and Société Générale (France).
Familiar names, eh? Reuters points out that “banks have become more cautious” to participate in precious metals clearing due to “the transformation of precious metals benchmarks” that were “led by a regulatory drive to make [the benchmarks] more robust to attempts of manipulation.” It adds, obliquely, “Several of [the big banks] have run into trouble with regulators over misdemeanors in their precious metals trading business.”
Ah, yes. Multi-billion-dollar misdemeanors.
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