LONDON • The world's biggest industrial metals exchange is taking on the most powerful players in the gold market with the launch yesterday of its first futures contract for the commodity since the middle of the 1980s.
The London Metal Exchange (LME) and its partners aim to grab a piece of the action in a city where almost half the world's gold changes hands. At stake are rival visions of how best to run the market, pitching the LME, Goldman Sachs and Morgan Stanley on one side and the London Bullion Market Association representing some of the biggest trading firms on the other. Three years in the making, the gold contract, launched alongside another for silver, aims to draw investors from the off-exchange deals currently dominating the city's market worth US$5 trillion (S$6.9 trillion) a year.
"The gestation period has been longer than that of an elephant, but the baby is finally here," said Mr Jeffrey Rhodes, founder of Rhodes Precious Metals Consultancy DMCC.
The LME, World Gold Council - representing miners - and partner banks hope to capitalise on regulators' push for more scrutiny by allowing investors to trade contracts on an exchange where transactions are tracked and risks managed. Their venture - including Goldman, Morgan Stanley, Natixis, ICBC Standard Bank, Societe Generale and OSTC - will centrally clear daily, monthly and quarterly futures contracts using LME Clear.
The group will need to overcome inertia among those wary of moving to a new benchmark for pricing precious metals. Adding to that, the bullion association, which represents firms trading in the market including HSBC, JPMorgan Chase and UBS, is already revamping the current go-to system to improve over-the-counter transactions.
Even the LME's parent, Hong Kong Exchanges & Clearing, had chosen yesterday as the day to launch a gold contract in the Chinese city.
"We did a radical rethink of how to make the market work in the 21st century, in the light of regulatory and cost pressures," said Mr Paul Walker, who in working with the World Gold Council was instrumental in developing the new system. "What's being delivered addresses all of that."