The European Central Bank (ECB) has issued a warning in its latest Financial Stability Report, published today.
The ECB’s Vice President, Luis de Guindos, is set to present this semi-annual study on Wednesday.
ECB economists have examined the sharp rise in gold prices since 2023, reaching historic highs, and the developments in derivatives markets.
Generally, gold serves as a safe haven during times of tension, especially amidst heightened geopolitical risks or political uncertainty.
However, “extreme events may lead to adverse effects on financial stability stemming from the gold markets,” cautioned ECB economists.
“This could occur despite the aggregate exposure of the euro area financial sector appearing limited compared to other asset classes, as the derivatives markets exhibit several vulnerabilities,” added the ECB.
This vulnerability arises from the tendency of commodity markets to be concentrated among a small number of large, often leveraged (indebted) companies, with substantial opacity due to the use of over-the-counter derivatives.
The ECB warns additional margin calls and the unwinding of leveraged positions could create liquidity strains in the market, potentially spreading problems throughout the financial system.
Furthermore, disruptions in the physical gold market could increase the risk of unexpected price spikes, causing some investors to struggle with physical gold delivery and suffer substantial losses, reflecting past occurrences in other commodity markets.
“Recent movements in gold futures markets, such as COMEX, particularly in contracts with physical delivery, confirm the close correlation between rising political uncertainty and gold prices,” states the ECB.
“Political uncertainty, especially regarding global trade agreements, has increased since the U.S. presidential elections in November 2024,” noted ECB economists.
More than half (58%) of asset managers anticipate gold to be the best-performing asset in the event of a trade war, according to surveys conducted in February and March.
The number of gold futures contracts for January 2025 delivery reached the highest level since July 2007.
The fact that investors have preferred to buy physical gold through futures markets indicates a preference for long positions in physical gold over contracts not settled physically.
These long positions are likely to benefit from gold’s reputation as a safe haven during periods of heightened economic uncertainty and trade policy.
Euro area investors are exposed to the euro through derivatives, resulting in significant exposures to foreign counterparties.
Gross national exposures to gold derivatives reached one trillion euros in March 2025, a 58% increase from November 2024.
A large portion of these derivative contracts is traded over-the-counter outside organized markets and is not subject to centralized clearing.
Forty-eight percent of gold derivative contracts involve a banking counterparty.
The majority of euro area banks’ exposures to gold derivatives are with counterparties outside the euro area, making them vulnerable to external shocks in the gold market.
Euro area exposures to gold via exchange-traded funds were minimal, amounting to 50 billion euros in the fourth quarter of 2024, primarily among households and investment funds.
