At a Glance
- Gold futures volume has surged 494 percent since 2002, and traded 10.7 billion ounces in 2018
- Market liquidity in exchange-listed futures is largely responsible for a shift from OTC contracts, according to CPM study
The full range of institutional investors have moved increasingly toward exchange-listed futures and options in precious metals, away from over the counter forwards and options. This trend began emerging around 2000 but has accelerated a couple of times in the ensuing two decades, as market forces, periodic financial spasms, regulatory changes, and structural changes in the buy and sell sides of financial markets have stimulated the move.
Precious Metals Trading Rising
CPM produced a report in June based on a range of detailed market research it undertook over the course of a year. We surveyed hedge fund managers, commodity trading advisors, and commodity pool operators, using both our own internal database and the best available market lists of fund managers.
Trading volumes by institutional investors on CME precious metals futures are rising sharply. Turnover appears to be declining in OTC markets, although the lack of trading statistics and transparency limits the ability to fully measure this.
Gold trading on futures exchanges totaled 10.7 billion ounces in 2018, more than double the 5.2 billion ounces of London OTC clearing volumes. This compares to London clearing volumes of 4.5 billion ounces in 2002 and futures volumes of 1.8 billion in 2002. That’s a 494 percent increase in futures volumes in the last 16 years. Silver futures trading has grown by 664 percent over the same time period, with futures volume (154.4 billion ounces) far outpacing OTC volume (57.9 billion ounces) in 2018.
This change is part of a broader, financial industry-wide shift toward regulated, listed products and markets, although there are aspects to the changes in the precious metals markets that are unique to these markets. While many of the changes underway in debt, equity, and currency products, and buy-side and sell-side structures are being heavily motivated by regulatory changes in Europe, the United Kingdom and the United States, with precious metals the key impetus of the changes have been instigated by buy-side institutional investors as opposed to regulators or product development groups.
As these changes are happening, the bid/ask spreads on CME futures contracts are contracting, making futures that much more attractive compared to OTC trading. The average bid/ask spread in a representative sample of gold trades in September 2018 was 55.7 percent less than the spreads in September 2013. For silver, the average spread was down 37.6 percent between 2014 and 2018.
Liquidity The Key Driver
Fund managers stress that their preference for exchange-listed futures and options is not so much driven by cost competitiveness as it is by non-financial benefits. They stress that the liquidity of the futures markets, especially in the nearby active front months, is superior, and that they are more comfortable putting on and modifying positions in the futures markets due to the greater liquidity.
It is not just liquidity, however. Investment fund managers made it clear that the ease of use, the transparency, and the existence of a well-established clearinghouse system that has been operating for decades all factored into their preference of exchange-traded futures and options over OTC derivatives.
As research for the June report CPM conducted a series of detailed interviews with fund managers actively and intensely involved in these markets, many of whom are CPM Group clients. The findings were based on these efforts. Perhaps ironically, CPM Group also trades for client accounts, as a commodity trading advisor. Our own trading patterns mirror the conclusions we found in the broader market. From even before our inception 33 years ago, we used OTC forwards and options for our clients’ hedge and investment positions. Beginning around 2003, we migrated to futures and exchange-traded options, for the same reasons others told us in our survey.