Caution Is the Order of the Day With Gold Liquidity

New Trends in the Bullion Markets Reflect a Decline in Overall Interest

Bank to bank activity with regards to trading gold bullion has declined in recent years. There has been a decline in interest in trading commodities with many financial institutions. As a result of this, the cost of conducting larger trades and hedging has increased significantly. Traders who prefer to trade small sizes can do so via their electronic trading platforms, but if you’re interested in making large-scale transactions of up to 200,000 ounces, it is difficult to do so without influencing the bullion price. Owing to the decline in interbank trading in gold, a debate is now raging about what system is best of gold trading. Some traders are suggesting that physical gold should be traded on these types of exchanges.

Strategic Review Launched by LBMA

The London Bullion Market Association (LBMA) conducted an investigation of the gold bullion market in April 2015. The goal of the review was to improve transparency and liquidity in the sector. The government in the United Kingdom is in the midst of examining the fixed income of London’s forex markets and commodity markets. Included in the mix are the benchmarks for Silver and Gold prices. However, there has been a degree of volatility in the markets of late causing liquidity to evaporate when it is needed most. More importantly, it is the banks that have reduced their activities in the bullion market. One of the reasons for this is the increased regulatory costs of operation. One such example of this is Deutsche Bank which made a decision to exit precious metals trading after cancelling participation in the gold fix. The Bank for International Settlements noted that the OTC derivatives that banks held at the conclusion of 2014 dropped to $300 billion. This figure is the lowest reported figure in 10 years.

China’s Shanghai Gold Exchange in Close Competition

The bulk of the liquidity is now run by ICE – the electronic fix. Others include the Comex in NY where futures are traded. For the most part, it’s the futures market and the fixing market that trading is focused on. Information from the over the counter (OTC) London market is not easily attainable. However, according to the London Bullion Market Association, February data revealed that a drop of 17.8 million ounces of gold took place between banks – a one-year low.

As a result, the London Bullion Market Association is pushing for more liquidity in the futures markets. For London, it is imperative that the LBMA gets all its ducks in a row, since London’s very own status as the epicenter of gold trading is at stake. There is stiff competition from China’s Shanghai Gold Exchange. Following the launch of an international trading board in the free trade zone in China, London’s status is under pressure. China remains the world’s largest gold consumer and producer.

Meanwhile bullion futures continue to record strong gains ahead of Federal Reserve Bank April minutes. On the Comex, gold rose by $2.30 for June delivery and settled at $1,227.60 per ounce. The last time gold hit this benchmark was on February 10 2015. The 200-day MA (Moving Average) is now at $1,223 and should there be a breakout, new buyers will come into the market. As a result, short-sellers will want to cover their positions. Another consideration is the U.S. Dollar Index which is higher than it has been in some time. For the quarter, it is down by 4 percentage points. As the dollar strengthens, so the price of commodities like gold which are priced in dollars increases.

Liquidity is Moving to Asia

UK banking giant HSBC is also an approved member of the international trading board in China. Further, HSBC believes there will be a Chinese fixing price prior to the year’s end in addition to widespread development of the bullion options market. There is no doubt that the liquidity in the gold market is rapidly moving to Asia, since there are plenty of financial resources for traders and investors to tap into. However, the London market remains an integral component of the global bullion trade.

Author’s Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting and CFD trading company – Intertrader.