CME Enters Race For Gold Pricing Benchmark After Winning Silver Fix Bid

September 10th, 2014 by Trefis Team
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Back in April, the London Bullion Market Association (LBMA) announced that the London Silver Fixing Market, the 117-year-old benchmark, would stop administrating silver prices in August. LBMA received proposals from the London Metals Exchange (LME), CME Group (NASDAQ:CME) and IntercontinentalExchange Group to provide an electronic solution, eventually choosing CME and Thomson Reuters. The partners went live with the new mechanism, LBMA Silver Price, on August 15. [1] The price-setting mechanism is transaction-based and fully electronic as compared to the previous method of fixing prices over the telephone.

Member banks and the LBMA announced their intent to start a similar electronic pricing system for Gold starting in October this year, and have asked interested firms to send in proposals to replace the current telephone-based system. CME and Thomson Reuters made their interest known last week, and will likely be competing with similar parties as for the silver bid including LME-Autilla partnership and the ICE Group. After successfully winning the bid for silver pricing, CME and Reuters seem to be frontrunners to win the gold bid as well. [2]

We have a $66 price estimate for CME’s stock, which is about 10% lower than the current market price.

See our full analysis for CME Group

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Gold And Silver Price Fixing

Gold prices are currently fixed by London Gold Market Fixing Limited, the company working on behalf of member banks. The number of member banks that set gold prices declined from five to four banks when Deutsche Bank resigned from its seats on the London silver and gold price-fix back in April. [3] At that time, a number of U.S.-based investors and traders had filed up to 20 different antitrust claims against Deutsche Bank, HSBC, Barclays, Société Générale and Bank of Nova Scotia for collaborating to manipulate gold prices. [4]

London Gold Market Fixing along with the LBMA issued a statement looking for a new administrator starting in October, also mentioning that the implementation of the new system is expected to be completed by the end of 2014. As precious metal fixing has come under increased scrutiny over the last few years, especially after the LIBOR scandal that involved the rigging of interest rates, open global benchmarks should help improve investor confidence in silver and gold trading. If CME is chosen to administer gold prices in addition to the silver price fix, it could have a multiplying effect on metal trading on CME’s platform, which has suffered due to low volumes in recent quarters. Moreover, it could have a negative impact on LME, the world’s largest trading venue for metals.

According to our estimates, metals and commodities trading constitutes about 18% of CME’s value, with over 20 million metal contracts traded in the June quarter. The rate per contract charged by CME for metal contract trading is the highest among all derivative classes at over $1.70 per contract. A boost in metals trading should help CME increase its average RPC which currently stands at about $0.75 per contract.

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Notes:
  1. LBMA Silver Price Launches New Era in Pricing Precious Metals, Market Watch, August 2014 [↩]
  2. CME Group throws down gauntlet in race to run gold fix, Reuters, September 2014 [↩]
  3. Deutsche Resigns Gold And Silver Price-fix Seats, Financial Times, April 2014 [↩]
  4. U.S. Lawsuits Hobble Deutsche Bank’s Bid To Sell Gold Fix Seat, Reuters, April 2014 [↩]