How Is CME Benefiting From Volatility In Gold Prices?

CME Group (NASDAQ:CME) has seen a significant increase in its metal contract trading volumes over the last two years. With gold derivatives accounting for the majority of the volumes among metal contracts traded on the exchange, this surge in volumes was largely driven by higher uncertainty surrounding gold prices. Continued macroeconomic uncertainty in the wake of the UK’s EU referendum and a subdued global macroeconomic environment are likely to keep safe haven investment demand for gold at elevated levels, which is expected to prop up the exchange’s trading volumes in the near term. Below we take a look at how gold prices have impacted the exchange’s derivatives volumes.

How Important Is Gold Derivatives Trading For CME?

CME derives almost 85% of its revenue from its transaction-based operations. Metal derivatives account for around 5% of this trading revenue and also account for roughly 5% of our price estimate for the company’s stock.

Gold is the most traded metal on CME, accounting for nearly 60% of the exchange’s metal derivative volumes.

How Have Gold Prices And Trading Volumes Trended?

Over the last 2 years, CME’s metal derivative volumes have continued to rise, primarily due to a surge in gold contract volumes. The rise in volumes was largely driven by volatility in the gold market over the course of the past two years, which began with a sharp decline in gold prices over much of 2014 and 2015. The winding down of the Federal Reserve’s Quantitative Easing (QE) program in response to strengthening economic conditions in the U.S. lowered investor appetite for gold, with gold ETFs and similar funds being net sellers of the commodity in 2014, translating into lower prices. Expectations of interest rate hikes amid steady U.S. economic growth further drove down gold prices in 2015.

However, 2016 has seen a reversal of this trend, with the U.K.’s Brexit vote heightening macroeconomic uncertainty and boosting investment demand for gold. Moreover, this uncertainty and subdued global economic growth have lowered the chances of a sharp interest rate hike by the Fed, further boosting gold prices in the near term. CME has benefited from the volatility in gold prices, as gold contracts traded on the exchange have seen a massive 56% increase in volumes.

What To Expect

With subdued global economic growth and macroeconomic uncertainty expected to prevail in the near term, we expect sustained investor interest in gold. We expect this to translate into sustained high volumes for CME. With changing expectations surrounding the timing of the next rate hike by the Fed also driving short-term volatility in gold prices, trading in gold derivatives is likely to be among the major drivers of the exchange’s revenues in the coming quarters.

See the full Trefis analysis for CME Group.

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