Goldman Sachs Up Against JPMorgan in Gold Battle in London
Henry Sanderson and Neil Hume
Financial Times, London
Financial Times, London
Some of the world's largest banks are battling over plans to make London's $5 trillion-a-year gold market more transparent in the biggest shake-up of global bullion trading for decades.
A consortium that includes Goldman Sachs, arguably the most influential bank in commodity markets, and ICBC, the big Chinese lender, are backing plans to bring the trading of precious metals on to an exchange early next year in a shift that reflects that of oil in the 1970s.
Such a move is intended to bring more transparency to the trading of gold, silver and other precious metals -- a centuries-old process conducted privately through banks that has been criticised for being opaque.
As recently as 18 months ago, the price of gold was still set, or "fixed," twice a day by a small group of banks conferring by telephone with clients. That century-old method has now been replaced by an electronic system but the majority of spot gold trading in London is still done directly, privately "over the counter."
The Goldman-backed consortium faces opposition from HSBC and JPMorgan, big bullion banks that want to maintain the current system and are supporting a rival initiative by the London Bullion Market Association to improve transparency.
The battle for London's bullion market comes as gold enjoys renewed popularity. Prices have rallied 26 per cent this year as investors, nervous about falling interest rates and shocks such as Brexit, have ploughed billions of dollars into exchange traded funds.
Whether gold continues to be traded directly between buyers and sellers, or moves on to an exchange, both sides agree the London market is at a key moment.
London faces increasing competition from China, the world's largest consumer of the metal, where trading volumes have been surging. Earlier this year the Shanghai Gold Exchange launched a daily pricing benchmark, similar to a process conducted in London since 1919.
The issue of regulation also has come to the fore after the benchmark-rigging scandals that rocked foreign exchange and interest rate markets after the financial crisis.
In response, regulators and policymakers have been pushing for a shift in markets in general towards trading assets on exchanges and clearing transactions through centralised systems.
Raj Kumar, head of precious metals strategic development at ICBC Standard Bank, said: "There's been a decline in liquidity within the London market. It's clear the market hasn't evolved for decades. With regulatory changes likely in the future the market is at risk of declining without suitable solutions."
Garry Jones, chief executive of the London Metal Exchange, said the plans to shake up the bullion market will address problems of transparency and introduce cost savings for banks. This view is echoed by Aram Shishmanian of the World Gold Council, which has led the project known as LME Precious.
"What is causing banks to leave commodities is the amount of capital they need to put up," said Mr Jones. "London is the largest OTC bullion market and this is trying to make sure it remains front and centre."
However, many market participants are suspicious. They say the World Gold Council is not involved in bullion trading, and that many banks have taken equity stakes in the new platform so they can profit from harnessing some of the London trade flows.
"This is a chance for the WGC to get involved in another revenue stream," said one big gold investor. The London-based lobby group introduced gold-backed exchange traded funds and continues to generate most of its income from a sponsorship deal with one of the biggest vehicles.
For that reason many support the approach of the LBMA, set up by the Bank of England in 1987 to regulate London's bullion market.
One gold investor said: "The LBMA is advancing with the ear of and the co-operation of regulators. The changes that have been done in the OTC gold market have been done with the implicit if not explicit approval of regulators. The steps they are taking seem to be very sensible."
Other banks that have not initially signed up to the new contracts said they might be willing to use the platform because it will provide competition for Comex, the New York exchange that boasts a highly liquid gold futures contract.
"There are some positives to have competition in the market," said the head of commodities at one investment bank. "Transactions costs are exploding because so much of the regulation is designed to push people toward exchange traded, cleared venues."
History, however, suggests the LME will struggle to make the project a success, much like an early foray into gold trading that flopped in the 1980s.
Known as the London Gold Futures Market and run out of the LME's old headquarters in Plantation House, it failed because considerable trading in gold futures was already under way on the Comex exchange in New York, participants said at the time.
John Wolff, a chairman of the LME in 1990, said: "The futures market in New York was working very well and the London bullion market itself was working very well, so there just wasn't room for a futures market in London."