Three U.S. Exchanges vie for Gold

The glitter of gold has generated a three-way competition among the world’s largest futures exchanges for a 100-ounce contract for the precious metal.

When the Chicago Mercantile Exchange (CME) re-introduces gold futures trading here Tuesday (at 9 a.m. CDT), it will go toe-to-toe in an uphill battle against the Commodity Exchange Inc. of New York (Comex), which brokerage executives describe as the world’s precious metals futures capital for institutional business.

And by autumn, the oldest and biggest exchange, the Chicago Board of Trade (CBT), expects to join the fray when the Commodity Futures Trading Commission (CFTC) approves a pending application for a 100-ounce gold contract to trade side-by-side with the CBT’s smaller, one kilogram (about 2.5 U.S. pounds) gold futures.

The CME introduced a 100-ounce gold futures contract in 1974, but lack of interest forced it to abandon the instrument in July 1986.

CME officials said investors and brokerage firms asked the exchange to reintroduce the contract because of recent volatility in precious metals. Other factors influencing the decision may also have been clearing problems in May which forced the Comex to shorten trading for three straight days in an effort to clear up a huge backlog of unresolved trades, especially in silver futures.

Comex’s problems may now create a window of opportunity for other exchanges to successfully offer precious metals contracts, industry sources say.

But it is much too early to predict whether other exchanges can inflict serious damage on the Comex’ daily trading volume of more than 40,000 contracts which represents commitments to buy and sell gold of more than 2 billion dlrs.

While average daily trading in the CBT’s smaller gold contract, aimed at retail customers rather than institutions, was under 500 contracts per day throughout 1986, it has surpassed 1,000 contracts daily for the past two months.

“The climate could not be better for this venture by the CME,” said Merrill Lynch Commodity Marketing Vice President Neil McGarrity.

“Everybody is talking about metals now, and interesting daily trading ranges provide opportunities for bulls and bears. There’s good trading volume in all world outlets,” McGarrity added.

“The Merc’s gold futures would be insurance for dealers, merchants and customers that there would be a market open for trading,” if heavy gold or silver futures volume causes the Comex to close early again, said Jack Lehman, senior vice president and director of commodities for Shearson Lehman Bros. Inc. and a Comex board member.

Delivery points vary for each exchange’s 100-ounce gold futures. Comex contracts are deliverable through New York warehouses while the CME contract specifies London delivery through a CME account at Samuel Montagu and Co. Ltd., a member of the London gold market. The CBT gold application specifies delivery from New York and Chicago vaults.

The Comex and the CBT have applied to the CFTC for an earlier precious metals opening to match the CME’s starting time of 7:20 a.m. CDT. The exchanges said the earlier start allows for trading before many important government reports are released at 7:30 a.m. CDT.

CME marketing sources said arbitrage possibilities exist with side-by-side trading, noting local interests can be generated by traders dealing in foreign currency and short-term debt futures along with gold futures contracts to further hedge their financial risks.

“If the dollar rises, traders can sell currencies and buy gold,” said David Johnson, CME’s manager of currency products.

The Chicago Board of Trade sees an extra advantage to gold trading. “Given our night trading session, we could add either our pending 100-ounce gold or our existing 5,000-ounce silver contract to attract overseas business,” a CBT official said.

Which market is identified as the precious metal capital does not appear to be a major issue among professionals.

“We’ve seen Chicago bring in a new constituency before, with perhaps different needs,” Mocatta Metals Chairman Dr. Henry Jarecki said.

“Merchants will go to the CME or anywhere to trade a liquid contract. Our firm is no exception,” Jarecki said.

“At worst, even if the CME gold futures fail, the Comex will be under pressure to improve the integrity of its clearing processes,” a CME official added.