An extreme dislocation in the global gold market earlier this year spurred banks to shift some positions out of New York futures and into the London over-the-counter market, according to a leading figure in the industry.
Market participants’ changing behavior is reflected in gold trading volumes in the two hubs, said London Bullion Market Association Chief Executive Officer Ruth Crowell. The amount of gold traded in the U.K.’s capital surpassed the U.S. futures market in recent months, she said.
“The scale of the dislocation has really made everyone ask questions in terms of the ongoing approach of hedging long London, short Comex,” Crowell said in a phone interview. “Certainly in the short to medium future, it’s not an even hedge. So they’re having to either go OTC, or they’re reducing their trading appetite.”
The London market, which the LBMA represents, has historically been the main hub for trading in spot gold. But volumes of swaps and forwards, which traders can use as a hedging mechanism instead of Comex futures, have increased recently, according to LBMA data. While the volumes remain below those in the futures market, they have risen to the highest relative level in records going back to November 2018.
Crowell pointed to a day of record trading volume in the London market on May 26 -- when 67 million ounces of gold, worth $115 billion, changed hands -- as evidence of some traders shifting positions into the London market.
If it is sustained, the shift risks undermining the popularity of the gold contract on New York’s Comex, which is owned by CME Group Inc. and is the world’s leading venue for trading precious-metals futures and options.