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How will LME exiting gold and silver futures affect metals?

By Indrabati Lahiri

09:00, 25 April 2022

A pile of gold and silver bars
The LME is exiting the gold and silver contracts market after five years – Photo: Shutterstock

The London Metal Exchange (LME), one of the world’s largest exchanges, recently announced that it will be exiting the gold and silver market after only five years of trading.

In 2017, backed by banking giants such as Morgan Stanley (MS) and Goldman Sachs (GS), the exchange had launched a number of precious metals futures contracts.

London is one of the biggest hubs of precious metals trading in the world, with JPMorgan Chase (JPM) and HSBC Holdings (HSBA) also being some of the top banks dealing with gold and silver. Along with the LME, the over-the-counter, or OTC market drives most precious metal trading in London, of which the London Bullion Market is a key part. 

Although the LME met with some success at the beginning of its precious metals trading journey, the closing down of a large chunk of Societe Generale’s (GLE) commodity trading branch dealt it a severe blow.

Gold prices hover near a one-month low

Silver prices linger near an 8-week low

How will move affect gold and silver markets?

Gold has fallen about 4% in the last four trading sessions, on the back of a continuously strengthening US dollar (DXY) and rising US Treasury yields. This has led to the gains the precious metal saw due to being a safe haven asset in the Russia-Ukraine conflict being pared back somewhat, as investors move towards riskier assets.

Silver has also been tracking gold’s moves and been trading in a fairly tight range over the last few days.

With the US Federal Reserve also pledging to increase interest rates much faster than expected, due to soaring inflation, gold demand has been increasingly dampened in recent days.

LME gold and silver contracts have been very scarcely traded for about a year, leading to the LME now planning to cease all gold and silver trading activity by 11 July this year. This may make it considerably harder to trade in these metals in London, leading to a scarcity in the short run, before over-the-counter trades and other global exchanges move to fill in the gap. Thus a short-term price hike in these metals may be possible, as investors seek other options.

However, in the medium-to-long run, the gap left by the LME is likely to be filled by other exchanges, such as the Shanghai Metal Exchange and the Chicago Mercantile Exchange, which are also major trading hubs for precious metals and are likely to drive business out of London.

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Long position overnight fee -0.0733%
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Short position overnight fee 0.0111%
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Long position overnight fee 0.0236%
Short position overnight fee -0.0455%
Overnight fee time 21:00 (UTC)
Spread 0.045

Will platinum and palladium be affected?

This move by the LME has led to investors wondering whether platinum and palladium markets may be affected as well. However, the LME currently does not have any palladium or platinum contracts, but function solely as pricing admistrators for these metals. 

Thus, so far, there is little evidence that this move is likely to affect other precious metals. Unlike gold and silver futures contracts, which have not been trading since 2020, platinum and palladium markets on the LME are much more active, with the London Platinum and Palladium Market working with the LME in order to administer prices through their auction platform, LMEbullion. 

However, with the recent banning of two state-owned Russian platinum and palladium refineries from the Good Delivery List of the London Platinum and Palladium Market, it has already become increasingly difficult to trade in these two precious metals in London. Thus, if in at any point in the future, the LME also decides to throw up roadblocks regarding the pricing of these metals, it may be next to impossible to trade these two metals in London.

After nickel chaos, is this the death knell for the LME?

The LME is still reeling from the recent nickel chaos, which has thrown the 145-year-old exchange into considerable disarray, with a series of probes and reviews being instigated against management.

Investors have already expressed significant frustration as millions worth of nickel contracts have been cancelled, with trading being stopped several times and a series of sputtering starts adding to widespread outrage.

This has led to the credibility of the exchange already coming under significant heat, with investors now demanding much more transparency and uniformity in its transactions and systems. Greater use of central counterparties and central-limit order books have also been recommended, in order to smooth out the kinks that have been plaguing the exchange lately.

With nickel trade finally refinding its footing somewhat, the LME’s decision to exit the gold and silver futures contract market is a fresh blow to still smarting investors, which may end up deciding its fate. Investors have already been looking towards the Shanghai and Chicago Exchanges much more, to fill in the gaping chasms left by LME’s inefficiencies. Thus, this may give them a final push towards finding other alternatives.

Markets in this article

2398.84 USD
-11.36 -0.470%
Goldman Sachs
486.72 USD
-5.5 -1.120%
6.630 USD
-0.032 -0.480%
JPMorgan Chase & Co (Extended Hours)
209.18 USD
-1.33 -0.630%
Morgan Stanley
102.05 USD
-1.56 -1.510%

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