LME Goes Precious, Brings Back Gold and Silver, Eventually PGMs

After a gap of 30 years, the London Metal Exchange is, in collaboration with the World Gold Council, getting back into precious metals. Not just because it sees an opportunity, but because the industry is in desperate need of an efficient and professional marketplace following the departure of principal banks from London’s Gold Fix in the wake of the Libor scandal and suggestions the Gold Fix could be manipulated.

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The LME announced this week it will launch centrally cleared gold and silver contracts on a platform called LMEprecious in the first half of next year, followed by platinum and palladium.

Gold bars
Gold will trade on the basis of London good-delivery 99.5% bars in 100 ounce lots. Source: Adobe Stock/misunseo.

According to Bloomberg, the new contracts are designed to complement London’s $5 trillion 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.

Who’s Got the LME’s Back?

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 and some 30 firms have expressed a desire to be engaged from the initial offering.

LMEprecious will be centrally cleared on LME Clear, the exchange’s clearing house, which already has an annual traded notional value of $12 trillion. Physical delivery will take place in London. Gold will trade on the basis of London good-delivery 99.5% bars in 100 ounce lots, (worth about $133,600 at current prices according to Reuters) while silver will trade 5,000 ounce lots for bars of 99.9% purity.

In a joint statement the LME and WGC have said “The initiative has been driven by the need for greater market transparency, to support and aid ongoing regulatory change, provide additional robustness to the precious metals market, broaden market access.”

Transparent Trading of Gold and Silver

The point about transparency comes back to the price discovery mechanism that was, in essence, the death knell of the old Gold Fix: Regulators were uncomfortable with what they saw as an arcane system of five banks getting together in a room with little flags to fix a daily gold price.

The new market will embrace all the principals of open market establishment of prices that regulators have sought in the wake of recent scandals. It is unusual for consumers, producers, financial players and regulators to be so aligned in their desire for and vision of what a market should be, usually the financial community may want to but producers do not, or consumers are keen but there is insufficient liquidity.

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In the case of LMEprecious, there appears to be a near universal acceptance of the need for and the appropriate structure for a precious metals market place, it will be interesting to see how quickly it gains traction.

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