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
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