European Central Bank sounds alarm: Under geopolitical pressure, the gold market may threaten financial stability in Europe

The latest research from the European Central Bank shows that the structural vulnerabilities in the gold market, combined with geopolitical risks, could pose a significant threat to financial stability in the Eurozone.

Influenced by Trump's global tariff policies, gold prices soared to a historic high of $3,500 per ounce last month. Although prices have since retreated, ECB economists believe that potential risks still exist.

Four economists from the European Central Bank, Maurizio Michael Habib, Oscar Schwartz Blicke, Emilio Siciliano, and Jonas Wendelborn, stated in a research report released on Monday, "Commodity markets are often dominated by a few large institutions, highly reliant on leverage, and exhibit high opacity due to the use of over-the-counter derivatives, all of which contribute to market vulnerabilities."

Data shows that currently, the Eurozone's exposure to gold derivatives has reached €1 trillion, a 58% increase since November 2024, with a large amount of over-the-counter trading and non-centralized clearing increasing systemic risk.

Market participants may face significant margin calls or difficulties in obtaining and transporting appropriate physical gold for derivative contract delivery, exposing themselves to potential massive losses.

Trade Policy Uncertainty Drives Up Gold Lending Costs and Futures Prices

Since 2023, gold prices have experienced unprecedented increases, continually setting historical highs.

During periods of heightened economic policy uncertainty, gold has outperformed stocks and the dollar, and when investors face geopolitical risks, stock market volatility, and policy uncertainty simultaneously, gold prices tend to rise alongside the value of the dollar, while stock and bond prices decline significantly.

Recently, data from the COMEX market shows a surge in gold futures, particularly in physical delivery contracts, reflecting market concerns over the current global policy ambiguity. Since the November 2024 U.S. presidential election, policy uncertainty related to global trade arrangements has sharply increased. According to surveys conducted in February and March 2025, 58% of asset managers believe that in the event of a full-scale trade conflict, gold will be the best-performing asset class.

The ECB stated that in the first quarter of 2025, the number of gold bar delivery notices reached the highest level since 2007. The influx of investors into physical gold indicates a preference for tangible hedging rather than purely financial contracts.

At the same time, the cost of borrowing gold has risen significantly. Before the U.S. announced tariff measures in 2024, the flow of gold from the London market to New York widened the price differential, indicating the market's sensitivity to policy changes. This pressure on supply chains and the tight situation regarding metal deliveries could trigger larger-scale risk shocks. If delivery obstacles arise, counterparties holding gold may face financial pressures—including margin calls, losses, or even defaults, potentially triggering a chain reaction.

Eurozone investors heavily engage with gold through derivatives, significant external counterparty risk

It is noteworthy that the gold derivatives market in Europe is enormous. In March 2025, the total nominal exposure of eurozone gold derivatives reached €1 trillion, a 58% increase from November 2024. A large number of OTC (over-the-counter) contracts are concentrated in banks, with some positions held by non-European financial institutions.

In contrast, the eurozone's exposure to gold through exchange-traded funds (ETFs) in the fourth quarter of 2024 was only €50 billion, which is relatively small compared to the total financial assets of counterparties. Gold ETFs are primarily held by households and investment funds.

The gold market may pose a threat to financial stability, and tail risks cannot be ignored

The European Central Bank (ECB) stated that although gold prices are driven by various factors, investors show strong demand for gold as a safe-haven asset and have a clear preference for physically delivered gold futures contracts at the beginning of 2025. These dynamics suggest that investors expect geopolitical risks and policy uncertainty to remain high or even escalate in the foreseeable future.

While the eurozone financial sector's total exposure to gold appears limited compared to other asset classes, there are various vulnerabilities in the commodity market. These vulnerabilities stem from the fact that the commodity market is often concentrated in a few large firms, typically involves leverage, and is characterized by high opacity due to the use of OTC derivatives.

"Margin calls and the liquidation of leveraged positions may lead to liquidity pressures for market participants, potentially transmitting shocks to the broader financial system.

Additionally, disruptions in the physical gold market may increase the risk of squeezes."

The ECB indicated that in such scenarios, market participants may face substantial margin calls or difficulties in obtaining and transporting appropriate physical gold for the delivery of derivative contracts, exposing themselves to potentially significant losses.