Gold has been on a strong rise in recent months. However, the European Central Bank has warned that gold markets could pose a risk to the financial stability of the eurozone in the event of geopolitical tensions.
The demand for physical settlements, the dominance of large entities and opaque transactions all combine to create a greater risk if something goes wrong, ECB economists wrote in a note published on Monday, a preview of a broader report due on Wednesday.
“If extreme events were to occur, there could be negative financial stability implications stemming from gold markets,” they wrote. “Vulnerabilities have emerged because commodity markets are typically concentrated in the hands of a few large firms, often involve leverage, and have a high degree of opacity resulting from the use of OTC derivatives,” they added.
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“Margin calls and unwinding of leveraged positions could lead to liquidity stress among market participants, potentially spreading the shock through the broader financial system,” they wrote. “In addition, disruptions in the physical gold market could increase the risk of a squeeze.”
In the euro area, gross nominal exposures to gold derivatives stood at €1 trillion in March 2025, an increase of 58% since November 2024, the ECB reported. The bulk of euro area banks’ exposures to gold derivatives are to non-euro area counterparties, suggesting some exposure to external shocks in the gold market. In contrast, euro area exposures to gold via ETFs stood at €50 billion in the fourth quarter of 2024, rather small compared to the total financial assets of counterparties. Gold ETFs were mainly held by households and investment funds, it added.
Political uncertainty, especially around global trade arrangements, has increased dramatically since the November 2024 US presidential election. According to research conducted in February and March 2025, 58% of asset managers would expect gold to be the best-performing asset class in a full-blown trade war scenario.
Gold traditionally serves as a “safe haven” – investors reach for it especially in times of economic and political crises. Current geopolitical tensions, changes in monetary policy and fears of an economic slowdown are causing interest in this precious metal to grow.
As the European Central Bank emphasizes: “gold remains an important safe-haven asset in the face of growing systemic uncertainty.” This is why investors are moving capital into gold, which is driving up its prices.
Prepared by JM
