LONDON Volumes in the global spot gold market have fallen to their lowest in a year, with shrinking liquidity and a slowdown in interbank trade making customers reluctant to transact on a large scale.
Tighter regulation and credit constraints resulting from the 2008-2009 financial crisis saw several banks withdraw from the commodity sector to ease cost pressures and boost efficiency against a background of lower raw material prices.
Price-setting was also transformed last year, in an attempt to address accusations of market manipulation. London bullion "fixes" morphed into electronically derived prices.
Dealers have noted a sharp decline in bank-to-bank activity - a mainstay of OTC (over the counter) gold trade.
"There would be around 20 to 25 interbank calls (to trade spot gold) on a busy day (back in 2007) ... now it's once in a blue moon," a gold and silver market maker said.
Another market maker, offering two-way quotations in gold and silver spot or forward trading, said each interbank call would "shift orders of 50,000 ounces a time", providing significant liquidity flows.
February's clearing statistics for gold, collected by the London Bullion Market Association, showed the volume of ounces transferred between London banks dropped to a one-year low of 17.8 million. Total ounces transferred continued to stay south of 20 million in March, the latest data available.
Volumes spiked briefly in June 2013 to 29 million as bullion plummeted 28 percent in two days, but on average the number stayed consistently below 20 million in 2014.
"The consequence of less interbank business is that there is less liquidity and when the market becomes illiquid it makes it more expensive for clients to do larger trades," bullion dealer Sharps Pixley's CEO Ross Norman said.
Interbank gold dealing has been consolidated for the most part into foreign-exchange trading on electronic platforms, with most banks exiting commodities opting to keep bullion.
Clearing statistics take into account paper and physical trades that are cleared in London, irrespective of the platform.
Customers with smaller volumes are probably getting tighter spreads and better prices, one ex-trader at a third market maker said.
"But when somebody has size to do, especially with algos out there, it can hit pockets of illiquidity and cause spikes or flash crashes," he added, referring to algorithmic trading, which uses advanced mathematic models for making transactions.
(Editing by Veronica Brown, Susan Thomas and Dale Hudson)