The market impact, a report published today jointly by the World Gold Council and the London Business School. Professor Anthony Neuberger was commissioned by the World Gold Council to lead research by the LBS into the impact of derivatives on the gold market. Gold has a very active derivatives market compared with other commodities, but it is not large compared with the market in financial derivatives. There is little doubt, concludes Professor Neuberger, that the growth of the derivatives market has been of benefit to individual users. The report discusses at length the controversial issue of whether the growth in the gold derivatives market has depressed the price of gold.
Derivatives do have an impact on the physical supply of gold to the market.
If the derivatives market were stable, with the initiation of new contracts being offset by the expiry of existing contracts, the effect would be neutral. However, gold is held as a store of value and an investment as well as bought as a consumption good. Investment demand for gold is influenced not by the price of gold but by changes in the expected rate of return from holding it, the report says. The increase in gold lending by the official sector has been instrumental to the growth of the derivatives market. However the Washington Agreement on Gold has limited the potential for future central bank lending, while underlying demand for hedging by producers is likely to fall as a result of the decline in new mining projects.