World Gold Council quiet on reports of London-based exchange

 

The World Gold Council would not comment Tuesday on reports that it and a group of banks have been in talks about opening an exchange in London -- where about 70% of the world's bullion trade takes place over the counter -- to try to increase market transparency.

 

"We are constantly exploring potential market development initiatives," a WGC spokeswoman said. "So, it is in the normal course of business that we are engaged in discussions with a number of individuals and organizations regarding the operation of the global gold market."

 

"As the market development organization for the gold industry, our overriding aim is to encourage a transparent, efficient and liquid gold market," she said.

 

A London-based broker said: "I would think the WGC is keen to explore new ways to generate income, having seen its membership fall and fees from ETFs drop. They also signed a MoU with the Shanghai Gold Exchange in January."

 

Gold exchange traded fund holdings fell roughly a third -- 26.5 million oz, or 825 mt -- in 2013, and were down a further 4.7 million oz in 2014.

 

During the first quarter of 2015, ETF holdings of gold increased 600,000 oz. Analysts at Japanese house Mitsui said Tuesday they expected a modest decline this year.

 

MIXED MARKET REACTION

 

"It is not clear to me what role the organization could play in establishing a new London exchange, nor what benefits such an exchange might bring to either the process of price discovery or to members," the broker said.

 

A trader said that "on the surface, it seems to make sense", while an analyst said the story seemed to be a rehash of a rumor first circulated last year. "There was an article resurfaced on this topic a week or so ago, but I think it was just the old article from last year," he said.

 

Last September, in a bid to bolster the growing gold market in China, the Shanghai Gold Exchange and WGC partnered to develop the Shanghai free-trade zone as the hub for the region's gold trade, with the backing of the People's Bank of China.

 

The Chinese gold market has grown sharply in the past 10 years, and China is now the largest market for both gold supply and demand.

 

Zhou Xiaochuan, governor of the People's Bank of China, said the launch of the International Board, as the partnership is known, "is integral to the construction of the Free Trade Zone and of China's financial market. It will accelerate the internationalization of China's gold market."

 

PRICE DISCOVERY GOES ELECTRONIC

 

In late March, US investment bank JP Morgan became the seventh direct participant in the London Bullion Market Association Gold Price twice daily electronic auction.

 

The LBMA Gold Price -- administrated by ICE Benchmark Administration -- launched March 20, replacing the long-established London Gold Fix.

 

The move came on the back of increasingly stringent regulatory conditions, and as banks saw revenues from commodities shrinking.

 

The other six direct participants who currently contribute to the LBMA Gold Price are Barclays Bank, Goldman Sachs International, HSBC Bank USA NA, Societe Generale, The Bank of Nova Scotia - ScotiaMocatta, and UBS.

 

Attention is now focused on when a Chinese bank will join the process.

 

A source close to the situation told Platts recently it was a case of getting paperwork in order and at least one Chinese bank was on the sidelines gearing up to join.

 

The shifting face of regulation and the fact the bulk of physical gold demand comes from China and India has sparked talk as to why the price is set in London in dollars.

 

As China's financial exchanges continue to grow, the country is likely to dominate global gold price discovery in future, ANZ said recently.

 

Last June, SGE chairman Xu Luode said a yuan-denominated gold price benchmark was needed as the Chinese gold market looks to open its gates to the international marketplace.

 

"We need gold fixing in renminbi. We have a US dollar price and a London price, we should have a price in China," the chairman said.

 

The LBMA Gold Price settled Friday morning at $1,208.50/oz.