Gold market liquidity dries up

The total volume of gold traded on the spot market recently fell to its lowest level in a year, according to reports Reuters. Banks are trading less gold in the global spot market for the precious metal, which has made large clients reluctant to make large transactions.

As a result of tighter regulations and restrictions on lending since the financial crisis, many banks have decided to wind down their trading in commodities and precious metals. As a result, the trading of gold on the spot market between banks in particular has fallen sharply. "On a busy day in 2007 there were 20 to 25 gold transactions between banks, now it's really a rarity", a trader told Reuters.

Another trader notes that around 50,000 troy ounces of gold were offered in each of these trades, providing significant liquidity in the market. Figures from the LBMA show that only 17.8 million troy ounces of gold were traded on the spot market in the month of February, the lowest level in a year. In March, the trading volume was again below 20 million troy ounces of gold.

Trading volume drops

In June 2013, the volume of gold offered on the spot market peaked at 29 million troy ounces, an increase that can be attributed to the extreme decline in the Gold price in that month. But throughout 2014, the monthly trading volume remained below 20 million troy ounces.

"The consequence of a declining trading volume between banks is that there is less liquidity in the market, which means that it becomes more expensive for customers to trade large volumes"Ross Norman, a gold trader at Sharps Pixley, told Reuters. When there is insufficient supply or demand in the market, a large sell order yields less. Conversely, of course, a higher price must be paid for a large purchase order. "If a trader wants to trade a large volume in a market that lacks liquidity, it can lead to sudden spikes or flash crashes"Norman added.

The LBMA's statistics cover both physical gold and gold that is only traded on paper, regardless of the trading platform on which the transaction takes place. In addition to the spot market, which gives a gold price 24 hours a day, there is also a fixing twice a day, which has been carried out on an electronic platform since March.

Liquidity in the gold spot market dries up