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Gold markets could be a source of danger to the euro zone’s financial stability in the event of geopolitical stress, the European Central Bank said.
Demand for physical settlement, the dominance of large-scale traders and opaque transactions all combine to pose a wider threat if things go awry, four staff economists wrote in a note published on Monday that will feature in a bigger risk report scheduled for Wednesday.
“Should extreme events materialize, there could be adverse effects on financial stability arising from gold markets,” they wrote. “Vulnerabilities have arisen because commodity markets tend to be concentrated among a few large firms, often involve leverage and have a high degree of opacity deriving from the use of OTC derivatives.”
Gold surged to a record above $3,500 an ounce last month in the wake of US President Donald Trump’s global tariffs. While it has since retreated, suffering the biggest weekly loss since November last week, the ECB economists identify lingering reasons for concern.
“Margin calls and the unwinding of leveraged positions could lead to liquidity stress among market participants, potentially propagating the shock through the wider financial system,” they wrote. “Additionally, disruptions in the physical gold market could increase the risk of a squeeze.”
Demand for the metal in the US in anticipation of Trump’s tariffs already caused a logjam at the Bank of England’s vaults earlier this year, and prompted a surge in Switzerland’s trade surplus with the US because of the need for refining to recast bullion shifting from London to New York.
Delivery issues could be a source of stress in future, said the ECB economists. They are Maurizio Michael Habib, Oscar Schwartz Blicke, Emilio Siciliano and Jonas Wendelborn.
“Market participants could be subject to significant margin calls and/or have trouble sourcing and transporting appropriate physical gold for delivery in derivatives contracts, leaving themselves exposed to potentially large losses,” they wrote.
(By Craig Stirling)
