Going for gold: London bullion market finds no clear path to increasing liquidity

The London bullion market is in a state of flux, with participants — ranging from bankers to brokers to exchanges — jostling to find out exactly what the other one wants in order for the market to evolve and fight off the increasing threat of business moving to Asia alongside mounting regulation.

The market is engaging behind closed doors to find out what it wants, but exactly what that is seems unclear to all involved.

"You've got the World Gold Council and the London Bullion Market Association both meeting people, but no one knows what it is that they want," said one broker.

The WGC represents the producers while the LBMA is an industry body that acts as a proxy regulator of sorts.

A senior-level banking source said that whatever the market is indeed searching for needs to be for the good of the London bullion market, and not just a means to make cash and get out.

Platts reported late September that the London market was seemingly unfazed by reports that the industry is in discussions to establish a central clearing system for gold trade. One outcome was that all agreed that any move in that direction would be welcomed.

A handful of banks are said to be looking to introduce a central clearing system for over-the-counter trades in light of increased regulation.

The banks in discussions include Morgan Stanley, Societe Generale, Goldman Sachs, ICBC/Standard Bank and Citigroup, according to market sources.

"What's interesting is who isn't involved in the talks," a fund source said.

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None of the banks mentioned actually vault gold in London, the source said, noting the absence of the likes of HSBC, Scotiamocatta, JP Morgan and UBS.

A senior bullion banker seemed to agree.

"Look at the names on the list; none are as active in the bullion market as us. It looks like some people could be in it for a quick buck," he said.

Another banking source said a central clearing system made sense, although he stressed it is old market chatter being recirculated.

"It's been mooted for years, especially after Lehman and the great financial crash," he said. "[It’s] old news if anything; I think central clearing is a logical next step for the industry."

"I know the industry is keen to demonstrate liquidity; a central clearing system could reduce capital requirements and allow publishing of volumes," another banker said, adding that this would please regulators and the market.

"The gold market in London is changing, led mainly by increased regulation," he said.

The LBMA is currently in discussions with the over-the-counter market with regards to publishing trade data.

The association is already looking at publishing trade data linked to its suite of benchmark prices in a bid to increase market transparency.

The primary aim would be to open a window on the OTC market.

Unlike an exchange, where trading is based around specific contract standards, an OTC market allows for a greater degree of flexibility.

In reaction a London Metal Exchange spokeswoman said via email, "LME Clear is already authorised by the Bank of England to clear gold and silver forward contracts, and stands ready to work with the industry to facilitate any possible market-led solution for the clearing of OTC gold."

Earlier this year the LBMA employed EY(opens in a new tab), formerly Ernst & Young, to work with the market to establish what is needed to increase confidence and transparency.

Regarding the possibility of central counterparty clearance, or the adoption of an exchange style platform rather than OTC, LBMA CEO Ruth Crowell said: "The big message we have received from the market via the EY review is it just adds to the cost of the existing model."

Crowell also said there is a question whether exchange services will enhance liquidity or "will it just push things to one center and diminish the OTC volume."

Liquidity remains a key concern for the gold market.

"You can't just create liquidity," chipped in one broker, "it's just not going to happen. The market needs to know what it wants."

The London bullion market is indeed in a state of transition, eyeing increased physical flows from west to east. However, for the time being it seems confused as to what is the best way in which to evolve in order to tackle shifting tides and increased scrutiny from regulators.

The quest continues. The talks continue. The answer remains difficult. For now.