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By: Frank Knopers
The London Metals Exchange, the largest commodity exchange in the world, will stop offering gold contracts after five years. The exchange launched these gold contracts in 2017 to make the gold market in London more transparent, but it never became a huge success. Market participants in London preferred so-called over the counter transactions, which take place directly between two parties.
The LME introduced the Gold Contracts in partnership with the World Gold Council and a number of major banks, including Goldman Sachs, ICBC, Standard Bank, Morgan Stanley and Societe Generale. When the latter decided to wind down its activities in commodity trading in 2019, the trading volume also decreased. Last year, Rumors that banks wanted to stop offering these gold contracts. It would no longer be profitable to offer this service any longer.
When we talk about gold contracts, we mean futures contracts for the delivery of gold. These contracts allow market participants to speculate on a price movement or to hedge against it. Consider, for example, a gold dealer who wants to protect his stock of gold coins against a possible drop in the price of gold. A trader can then sell the same weight of gold on paper on the futures market to hedge his position. As a result, he no longer runs any price risk.
Speculators can also trade futures contracts to profit from an expected rise or fall in the price of gold. The trader then only has to put in a margin to take a position, a margin that is many times smaller than the total value of the contract. Unlike options, with a futures contract, a gold dealer is required to deliver or take away at the end of the term. The settlement of a futures contract is also referred to as a Settlement said.
The Commodities Exchange Inc. (Comex) in New York is the main market for this type of futures contract. Market participants worldwide use this futures market to trade precious metals on paper. The trading volumes are public and everyone can see how many contracts are outstanding for delivery on a given timeframe.
The gold market in London, on the other hand, is mainly divided into over the counter transactions, in which two parties directly agree on price and delivery terms. The exact size of this market is difficult to estimate because these transactions do not take place publicly. Information about price and volume are not known for all participants. With the launch of gold contracts, the World Gold Council tried to make the gold market in London more transparent.
However, success did not come. While more than 3 million troy ounces of gold were traded shortly after launch, in 2019 only a quarter of that remained. Trading volume fell further in March as banks in London were trading more than 10 million troy ounces of gold daily, according to LBMA estimates. over the counter sell. Even the increase in the price of gold during this period To no avail.
The disappearance of gold futures contracts in London does not actually have a major impact on the gold market. Due to network effects, most traders, even outside the United States, decide to trade gold on paper through the Comex. This practice continues, even with the disappearance of the gold futures market in London.
The gold market in London will continue to be an important hub for the international gold market even after the delisting of futures contracts. If only because there are so many gold banks and gold vaults located in London City. Most transactions in this market will be over the counter continue to take place, futures trading was already minimal.
The scrapping of gold futures contracts is the most painful for the London Metals Exchange. The commodity stock market was recently in the news due to a short squeeze in the nickel futures market. In the absence of trading volume Exploded The price of this metal went from about $20,000 to $100,000 per ton in two days. The commodity exchange then went into lockdown for days, leaving traders unable to hedge positions.
Even more serious, the LME reversed $3.9 billion worth of trades to protect a party with a large short position. As a result, some traders suffered large losses. This has significantly eroded confidence in this commodity exchange, which has been around since 1887. The cancellation of precious metals futures, which is expected to happen in July, is another setback.
This contribution comes from Geotrendlines
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