An extreme dislocation in the global gold market earlier this year spurred banks to shift some positions out of New York futures and into the London over-the-counter (OTC) market, a leading figure in the industry has said.
Market participants’ changing behavior is reflected in gold trading volumes in the two hubs, London Bullion Market Association (LBMA) chief executive officer Ruth Crowell said.
The amount of gold traded in the British capital surpassed the US futures market in the past few months, she said.
Photo: Reuters
The price of spot gold on Friday rose 0.4 percent to settle at US$1,734 an ounce, up 3.3 percent for the week.
The gold market, which is dominated by big banks, such as JPMorgan Chase & Co, HSBC Holdings PLC and UBS Group AG, was upended in late March as coronavirus lockdowns grounded airplanes and closed refineries, leading traders to worry they would not be able to get gold to New York in time to deliver against futures contracts.
That caused futures, which typically trade in lockstep with the London spot price, to soar to a premium of as much as US$70 an ounce.
The dislocation inflicted painful losses on banks, which typically sell futures in New York as a hedge for their positions in the London OTC market.
HSBC, for example, suffered mark-to-market losses of close to US$200 million in one day, according to a regulatory filing.
“The scale of the dislocation has really made everyone ask questions in terms of the ongoing approach of hedging long London, short Comex,” Crowell said in a telephone interview. “Certainly in the short to medium future, it’s not an even hedge. So they’re having to either go OTC, or they’re reducing their trading appetite.”
The London market, which the LBMA represents, has historically been the main hub for trading in spot gold.
However, volumes of swaps and forwards, which traders can use as a hedging mechanism instead of Comex futures, have increased recently, LBMA data showed.
While the volumes remain below those in the futures market, they have risen to the highest relative level in records going back to November 2018.
Crowell pointed to a day of record trading volume in the London market on May 26 — when 67 million ounces of gold, worth US$115 billion, changed hands — as evidence of some traders shifting positions into the London market.
If it is sustained, the shift risks undermining the popularity of the gold contract on New York’s Comex, which is owned by CME Group Inc and is the world’s leading venue for trading precious metals futures and options.
The gold contract is performing “as designed,” a CME spokesman said by e-mail. “We continue to work with market participants to evolve our offerings and continue to ensure our products deliver the most liquid, cost effective and transparent risk management tools.”
The US exchange responded to the turbulence in March by launching a new contract that allows delivery of 400-ounce bars, the form traded in London, as well as the 100-ounce and kilobars allowed under the main futures contract.
However, the new contract has barely traded.
Crowell said that market participants were discussing issues with the Comex, including allowing delivery of gold in London, and she expected there could be an announcement from the US exchange in the next month or so.
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