China mounts gold liquidity grab as London market reforms

VIENNA (Reuters) - As the London gold market enters its next phase of reform, a sense of urgency is key because competitors, including commodity consuming giant China, are poised with new products to grab liquidity and global influence.

A worker places gold bullion on display at Hatton Garden Metals precious metal dealers in London, Britain July 21, 2015. REUTERS/Neil Hall

Global liquidity is shrinking due to persistently low gold prices as the market still struggles to shake off the impact of a seismic crash two years ago. Bruised investors have largely stayed away, while dealing desks have also become smaller.

London, currently the global market nucleus, is re-examining the way bullion is traded after sweeping reform of its price benchmarks.

At the same time, China, the metal’s largest consumer and producer, is aiming to become a price setter with its yuan-denominated gold benchmark by the end of 2015, a move that could beat any rivals’ effort to increase market share.

“There are too many vested interests and China is likely to win the main prize, because it wants to influence the prices of the commodities it is the biggest user of,” one senior London trader said at the opening of the gold industry’s annual conference, this year in Vienna.

The London Metal Exchange (LME)’s CEO Garry Jones said last month it was in talks with those in the gold industry over the launch of a precious metals derivatives.

The Chicago Mercantile Exchange (CME) CME.O is also developing a European gold futures contract to serve customers in London, sources told Reuters in May, in what would be a direct challenge to London's traditional cash market.

The need to make the $5 trillion a year over-the-counter market more transparent, profitable and liquid led the London Bullion Market Association (LBMA) to formally ask exchanges and technology firms to bid for services such as a gold exchange or a clearing platform.

Greater regulatory scrutiny, which has already forced changes in how precious metals prices are set, has not mandated central clearing but the industry accepts that larger changes lie ahead.

“Central clearing is the way forward, because brokers are finding more difficult to have credit lines open with the few counterparties left, given that many are withdrawing,” the head of gold trading at a European bank said.

As prices of commodities tumble and profits shrink, banks and brokers, including Deutsche Bank and Mitsui, have retreated from the London gold market.

“Some players don’t wish to play anymore. This trend is not good news,” said Adrian Ash, head of research at BullionVault.

“Markets need market makers -- willing to quote firm prices to buy and to sell -- and the more the better. Fewer participants risks less competition, wider spreads, and lower trading volumes.”

In the meantime, European traders see that China’s plan to launch its yuan-based price via the Shanghai Gold Exchange will work, if yuan convertibility into a global currency takes off.

“China is already taking liquidity from the London market and will make its best effort to continue to do so,” another trader said.

The SGE has already launched an international platform of the bourse last year, allowing foreign players to trade yuan-denominated gold contracts for the first time.

Additional reporting by A. Ananthalakshmi in Singapore. Editing by Veronica Brown and Louise Heavens