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An attempt by several banks to offer gold contracts in London seems to be going down ingloriously. Four years after the introduction of these contracts, the trading volume is still very low, making their survival uncertain. Banks that offer these contracts on the London Metals Exchange are said to be planning to pull the plug, according to the report Reuters.
In 2017, a group of banks launched a futures market for gold and silver on the London Metals Exchange (LME). This new Gold Contracts should entice gold banks and traders to trade more through this exchange. This should increase transparency in the gold market. In London, most gold transactions still take place directly between traders through so-called over the counter (OTC) transactions. On an annual basis, this amounts to an estimated $17 trillion.
At the time, the LME launched a cooperation with Goldman Sachs and Morgan Stanley to offer gold contracts and actively promote them. It was hoped that stricter regulation would cause traders to shift some of their operations to the futures market. But the biggest traders in the market, including gold banks like JP Morgan and HSBC, ignored these contracts.
In 2019, French bank Société Générale, one of the LME's partners, decided to end its commodity trading activities. As a result, trading volume in the London futures market for gold and silver fell to an all-time low. Since then, there has been hardly any trading in these contracts, such as Figures of the LME.
Several sources told Reuters that there is little motivation among participating banks to facilitate the trading of these gold contracts any longer. It costs the banks several hundred thousand a year to offer this service, while they hardly earn any money from it. So there is a good chance that these futures contracts will disappear after 2022, when the first five-year term expires.
Although the gold contracts on the London Metals Exchange got off to a positive start, the trading volume soon started to decline. Banks offering these gold contracts already wrote off the project in full on their balance sheets last year, from a valuation of $2.5 million to zero. As a result, the future of these gold contracts has become extremely uncertain.
This development shows that traders in London still prefer to do business directly with each other, without the intervention of an exchange. Much to the dismay of regulators, who want to gain more insight into the non-transparent gold market. They want more gold trading to take place via exchanges, so that they can gain more insight into the market participants, the trading volume and the liquidity of the market. It is therefore not excluded that there will be a new attempt to revive the gold contract market in London in the future.
Tip: In This article Jan Nieuwenhuijs describes how the gold market works and what role the futures market plays in it.
This contribution was made from Geotrendlines
