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I joined the precious metals market in 2003 working for HSBC in London.
When I started, I was working in back office roles until moving to the front office to work on the treasury desk. Shortly thereafter I got the chance to transition to the precious metals desk as a junior trader. From there, my career grew and I had the opportunity to move to New York. I actually moved there the week before Lehman Brothers collapsed so the markets were extremely volatile. It was a transitional time for the Precious metals market too, which traditionally was traded over the counter (OTC) with liquidity being sourced across market makers by voice. As credit conditions tightened between counterparties (due to the unknowns of the early stages of GFC), liquidity to trade metal futures shifted rapidly to centralized clearing via the CME. During this time, hedge funds seemed to become even more active as they could trade with lower margin requirements and tighter spreads on exchange and gold prices were having 5/10% moves regularly, especially as the Federal Reserve Bank embarked on the first round of quantitative easing in 2008 to support financial markets. It was a very exciting time to be market making in the United States. I eventually landed in Hong Kong where I served as Global Head of Metals Trading for Standard Chartered. In this role, I managed teams throughout China/HK, Singapore, London, and the United States. Our team covered clients that included producers, refiner jewelers, and financial institutions, and we traded across a number of different exchanges across the globe. One of our greatest achievements outside of trading was where we became the first Western Bank to gain a membership for the Shanghai futures Exchange to trade Precious metals for 10 years.
In 2020, the COVID-19 outbreak created extreme volatility in the precious metals market as the world went into lockdown. This greatly impacted the regular flow of precious metals across the value chain. Countries like the US banned commercial flights from Europe which would usually transport gold from major refining hubs in Switzerland. In addition, severe lockdowns in Asia massively reduced the demand for gold which created price dislocations never seen before in the precious metals market. The outcome of the lockdowns was a risk that had never been modeled at a bank so there was extreme pnl volatility. At one point, an ounce of gold in China traded at a 15% discount to the price in US which was unprecedented. During this time, DRW began taking a larger interest in the precious metals market and I jumped at the opportunity to join the firm in 2021 and help them grow the precious metals desk.
DRW trades a wide variety of precious metals products including derivatives, physical metals, and ETFs.
We also trade tokenized gold products working closely with the Cumberland trading team. As a firm we see further synergies between the centralized and decentralized markets trading tokenized commodities.
Some of the key factors that we look at when trading are highlighted below:
Understanding Supply and Demand Profiles: We analyze the physical premiums for key consuming countries like China and India to try and get a sense for the fundamental demand for metals. This includes evaluating the import and export numbers.
Additionally, almost all of the gold ever mined still sits above ground, whether in the shape of a coin, bar or jewelry which makes gold close to insensitive to supply-side disruption. Minor metals such as platinum and palladium are much more sensitive to supply so the war in Ukraine has had a larger impact on metals such as palladium where Russia produces 40% of the World’s annual supply.
Positioning Analysis: This is the demand side analysis of investors who trade Futures and ETFs which includes studying the commitment of trader reports and global ETF positions. This also entails understanding at what price points those positions have been put on as investors are more price sensitive. This helps give us a sense on where potential liquidation can come in at a later date as investors close out positions.
Evaluating the Macro Landscape: Precious metals prices are influenced by wider financial markets, economic policies and geo-politics. This year Gold prices strengthened due to safe haven demand at the start of the Ukraine war and had the back drop of heightened inflation concerns eroding value of fiat currencies, however gold prices have weakened over recent months in response to higher interest rates globally to fight inflation and ‘perceived’ known risks regarding geo-politics.
Liquidity: How liquid are the markets? The precious metals are balance sheet intensive and when funding conditions are tight, firms tend to lend or sell metal to reduce funding requirements which can often create dislocations or arbitrage opportunities.
Technical Analysis: This is a chart-based analysis to help determine entry and exit levels into directional trades and turning trends in prices.
From a risk-taking perspective, we are tying in a variety of factors– macro, positioning, technical analysis and physical premiums to take on directional risks. At DRW, we try to determine where the best risk/reward is – whether it is an outright position or whether we should be using an options strategy to give us exposure to a directional view on the price.