The trading of commodities consists of physical andderivatives trading. This report mainly focuses oncommodity derivatives that are traded on exchangesand OTC derivatives markets. The report also gives anoverview of the global bullion market and London’simportance as the largest market in the world for goldand silver trading.
Commodities have seen an upturn in the volume of trading on exchangesin recent years. The number of contracts traded increased by nearly a half inthe three years up to 2010 (Chart 1), following on from strong growth seensince the start of the decade. This was largely a result of the growingattraction of commodities as an asset class and a proliferation of investmentoptions which has made it easier to access this market. On the other hand,the notional value outstanding of OTC commodities derivatives fell by two-thirds during this period, as investors reduced risk following a five-foldincrease in value outstanding in the previous three years. London is one ofthe main global centres for commodities derivatives trading along with NewYork and Chicago. While Chicago is predominantly a domestic market,London and New York source a large volume of international business.Commodity assets under management more than doubled between 2008and 2010 to nearly $380bn. Inflows into the sector totalled over $60bn in2010, the second highest year on record, down from the record $72bnallocated to commodities funds in the previous year (Chart 2). The bulk offunds went into precious metals and energy products. The growth in pricesof many commodities in 2010 (Chart 3) contributed to the increase in thevalue of commodities funds under management. For example, the price ofgold posted a record high during the year and silver a 30 year high.
OTC derivatives trading
The notional value outstanding of OTCcommodities’ derivatives contracts fell 3% in the six months to June 2010to $2.9 trillion, extending the fall from the previous two years. Preciousmetals accounted for 19% of the value outstanding at the end of 2010,down from 41% a decade earlier as trading in energy derivatives rose. Alarge proportion of trading in precious metals takes place on the OTCmarket in London. The average daily volume of gold and silver cleared atthe London Bullion Market Association (LBMA) in December 2010 was18.0 million ounces (worth $25.0bn) and 99.7 million ounces ($2.9bn)respectively. This means that an amount equal to the annual gold mineproduction was cleared at the LBMA every 4.4 days, and to the annual silverproduction every 7.5 days. London is also a leading centre for energybrokers operating in energy and carbon markets.
exchange trading ofcommodities
up 47% inthree years
June 2010 for OTC derivatives;
Number of contracts traded;
Notional value outstandingSource: BIS, IMF; FIA; TheCityUK estimates-10001002003004005002008-2010
Commodity assets under management
Source: Barclays Capital
$bn, assets undermanagement (bars)
$bn, annualinﬂow (line)