Weekly Market Outlook

Gold Back to Futures on London Metal Exchange After Thirty Years

Three decades after London’s exchange-traded gold contract flopped, it’s coming back.

The London Metal Exchange, along with the World Gold Council and a group of banks and trading firms, are starting a new venture called LMEprecious, which will introduce centrally-cleared gold and silver contracts in the first half of next year, and later add platinum and palladium, according to a joint statement.

The LME is moving into gold to capture part of the $5 trillion over-the-counter market in London, the global hub for trading the metal, as regulators push for more regulation over commodities trading and centralized clearing. The LME has been considering expanding into precious metal contracts for years while the World Gold Council has explored the possibility of introducing exchange-trading since early 2015.

The LME’s previous attempt at trading gold lasted three years with the venture, London Gold Futures Market, closing in 1985 because of a lack of domestic investor and speculator interest.

Liquidity, Transparency

“Liquidity has dropped in London, to an extent that is unhealthy and to revive it is crucially important,” Aram Shishmanian, the chief executive of the World Gold Council said in an interview in London on Monday. “This will increase transparency and respond to regulatory changes, not just by being reactive, but by anticipating what we know will come.”

The new contracts are designed to complement London’s over-the-counter gold and silver market and will include contracts for spot, daily and monthly futures, options and calendar spread contracts, according to the statement.

Trading house OSTC and banks Goldman Sachs Group Inc., ICBC Standard Bank Plc, Morgan Stanley, Natixis SA and Societe Generale SA will co-own the LMEprecious platform and will act as liquidity providers.

LMEprecious will be centrally cleared on LME Clear. Physical delivery will take place in London. Gold will trade on the basis of London good-delivery 99.5 percent bars in 100 ounce lots, while silver will trade 5,000 ounce lots for bars of 99.9 percent purity.

Industry Partnership

“This is a partnership with the industry,” said Garry Jones, chief executive officer of the LME. “The LME already has the market infrastructure, so it is a natural choice, but more importantly, all the bullion banks are already connected to our clearing house.”

The intent isn’t to change the way London trades gold, but rather to add another layer of trading, he said. The venture is not closed to new partners and trading will be open to other participants.

“We’ve had significant discussions with a lot of market participants,” Jones said. “This is the first time that anyone has taken on the issue of clearing for spot. People are already trading futures, but to trade everything together in one trading pool gives us confidence that it will be success.”