On 29 August, the London Metal Exchange (LME) began publication of a set
of daily
reference prices for gold and silver. These reference prices aim to
capture and reflect paper gold and silver market prices as at 10:30 am, 12:00
midday, and 3:00 pm London time.
Anyone familiar with the former London gold and silver fix auctions, or
the successor LBMA Gold Price and LBMA Silver Price auctions, will know that
the LBMA gold auction is conducted twice daily at 10:30 am and 3.00 pm London
time, while the silver auction is held once daily at midday. These auctions
are also for unallocated book entry gold and silver (paper gold and silver)
in the London market. ICE Benchmark Administration (IBA) is the auction
administrator for both of these LBMA auctions.
Peak Liquidity
As these new reference prices published by the London Metal Exchange are
timed to report ‘market’ prices for gold and silver at exactly the same times
as the LBMA Gold and LBMA Silver auctions, they add an element of future
competition between the LME and ICE in the benchmark price provision
business. However, the LME’s prices for both gold and silver are
calculated at each of the 3 times of the ICE / LBMA auctions, i.e. at 10:30am
(LBMA morning gold auction), 12:00 (LBMA silver auction) and 3:00pm (LBMA
afternoon gold auction), periods which the LME describes as having ‘peak
liquidity’.
In July 2017, the LME launched a suite
of gold and silver futures contracts (LME Gold and LME Silver) for the
London market, 2 of which are Spot daily contracts in gold and silver,
respectively. Under the hood, these new gold and silver daily reference
prices published by the LME are just volume weighted average prices (VWAP) of
these LME Gold and LME Silver spot contracts calculated over a 2 minute
window at the relevant times each day (i.e. 10:30 am, midday, and 3:00 pm)
based on trades on the LMEselect trading platform. These contracts also
represent claims on unallocated book entry paper gold and silver in the
London market.
Therefore, the LME reference prices are not based on any auction trades,
and merely use prices ‘discovered’ (generated) on the LME’s own trading
platform at the time of the LBMA / ICE auctions. Given that these new LME
reference prices only began to be published on 29 August, there are only
about 50 daily data points so far for each of gold and silver. All
prices since 29 August can be seen on the LME website for gold and
silver.
Different But Similar
But are these LME prices the same as those generated by the ICE / LBMA
daily auctions? No, they are not the same, but they are similar. The reason
both sets of prices are not the same is that they are derived differently.
The LBMA price resulting from an auction is the price derived in the final
round of an auction when the imbalance between the auction’s buy and
sell volumes is in tolerance (less than 10,000 ounces). The LME reference
prices are average prices calculated (and volume weighted) using trades
executed on the LME’s trading platform over a 2 minute interval from the
start of an auction until 2 minutes after the start of an auction.
The LBMA auction prices and the LME reference prices are similar in that
they are both based on market activity over similar time periods within the
wholesale gold and silver markets, and in practice (or at least in theory),
arbitrage trading should act to keep prices in the OTC market, and in the
LBMA auctions, and in COMEX precious metals futures trading, and in LME gold
and silver futures trading in line with each other.
Like their predecessors the London Gold fix and London Silver fix,
the LBMA Gold Price and LBMA Silver Price are used every day to value
everything from ISDA contracts to gold-backed ETFs, and the daily
auction prices are also referenced widely in the global precious metals
industry to execute trades involving miners, refineries, bullion banks,
central banks, jewellers and coin shops. In short, these LBMA gold and silver
reference prices are the dominant incumbent reference prices, and they also
qualify as Regulated Benchmarks regulated by the UK Financial Conduct
Authority. But will anyone end up using these new LME precious metals
reference prices? Possibly, but it could it a while.
In 2018, the LME intends to offer trading based on its new gold and
reference price reference levels. According to a Reuters
article from 10 October:
“As of mid-2018 participants will be able to trade at those prices,
Chamberlain [LME CEO] said, with technology being developed to match buy and
sell orders for execution at the settlement price.
‘Benchmarks take a long time to evolve,’ he said. ‘What we can do is
put in place the infrastructure, show that we have day after day of robust
prices, but ultimately it is for end-users to decide what they want to use.'”
Being able to trade at the LME reference prices will add more relevance to
the published numbers and could add legitimacy in terms of market data and
financial media interest.
Conclusion
Right now the LME gold and silver reference prices are published daily and
are “available for market participants to use free of charge.” But
real world usage in the sense of being used to value precious metals funds,
contracts or transactions looks to be a case of “down the road”
rather than today.
Ideally the London gold and silver markets do not need an additional
benchmark reflecting fractionally-backed unallocated gold and silver trading,
but a benchmark and reference price reflecting the trading of real physical
gold and silver. However, as the LME has chosen not to upset the status quo
of the London unallocated trading system, a system which remains one of the
key determinants of the international gold price, then real physical gold and
silver reference prices in the London market will unfortunately remain a pipe
dream.
Ronan Manly
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