OREANDA-NEWS. London, the traditional home/hub of the world’s gold trade, could be slowly losing its grip on power as more and more of the world’s physical gold moves from London’s vaults to Asia, chiefly China. This part of the story isn’t really anything new. But recent news about a memorandum of understanding provides a new option for the story to develop.

Since 2013, when Western investors started to liquidate Exchange Traded Fund holdings of gold, and the dollar price in turn started its descent from historic highs, China has been stocking up gold.

The London Bullion Market Association needs to keep London relevant. A deal with the LME — which is owned by Hong Kong Exchanges and Clearing — would mean a direct link to the Chinese market, the world’s number one gold consumer.

“The Chinese are buying the gold, why would London want the US [via CME] to dominate the space?” said one banker.

Now, the LME’s ante was upped week of March 21, on news that HKEx and the Shanghai Gold Exchange have signed a non-binding MOU to consider potential, amongst other things, joint development of precious metals products and cross-market connectivity.

SGE Chairman Jiao Jinpu said that the exchange “is committed to innovation and the opening-up of China’s gold market, to better serve the gold industry, and promote the internationalization of yuan.”

Then there’s CME. At the moment it faces a slight uphill battle, owing to some reputational damage linked to recent hiccups related to the LBMA Silver Price (operated and administrated by CME and Thomson Reuters).

It is worth noting that CME does have exposure to Asian markets, and in late 2014 CME signed a memorandum of understanding with the SGE to “positively explore possibilities of cooperation between the domestic and international markets.”

Perhaps SGE should also be involved in the rumours for London domination?

The result of the LBMA’s initiatives should create a platform that creates future growth for the London market.

“[The] LBMA intends for the new services to be able to support the introduction of future services — for example over-the-counter clearing — subject to the appropriate market regulatory conditions and LBMA membership demand,” the industry body said on its website.

In a recent interview with Platts, LBMA CEO Ruth Crowell suggested any solution could come about from various partnerships of the entities involved.

Still, one source shrugged that off entirely.

“Do you really believe anyone in the rumored list would want to work with the next one?” he said.

There still seems to be a strong belief that the LME’s determination to run the London gold market keeps it in the number one slot to win the bid.

The LBMA would own the intellectual property of any successful RFI candidate’s technology platform.

LME Clear is already set up and approved to clear precious metals. The exchange included precious metals in its requests for regulatory approvals when it set up the clearing house.

One banker said that “LME are set up for their own thing. But we still want the LBMA to ask the members what we want before being lumped with a choice from the good, the bad and the ugly again.”

Then we come to IntercontinentalExchange. It operates/administrates the LBMA Gold Price (the LME operates the LBMA Platinum/Palladium prices) and so in theory already has a bigger piece of the pie. As such it recently has been heard to be a possible outside favourite.

ABS and Autilla also have support. But their voices seem to being washed aside by the banging of larger exchange’s drums, namely the LME. One trader thinks that of all the candidates, ABS has the best understanding of the physical market. There was also growing support for Autilla’s technology.

“Autilla has the best platform as it was built by traders for traders who knew what the real needs are. ABS is not a bad shout, too, but I think [the fact they are] based in Asia may cause some issues,” said a banker.

ABS and Autilla are both technology companies, and not exchanges like the other three candidates.

There is also the fear that all of this could lead to fragmentation, possibly the worst signal London could send to the world.

“I don’t really see the RFI leading to a cohesive solution unless they [the LBMA] give it all to one player,” said one source.

Let us not forget, Dick Whittington found when he went to London that the streets were in fact grimy and poverty-stricken, and not, as hoped, paved with gold.

Let’s hope that’s not the case and the London bullion market continues to shine.

“Whatever the outcome, the next few weeks should start to get busy,” said one senior source, suggesting that perhaps the LBMA may not be the author of the next chapter of the London bullion revolution.