ECB warns: Gold price could cause financial markets to wobble!

ECB warns: Gold price could cause financial markets to wobble!

The European Central Bank (ECB) has urgently warned of possible disruptions in the financial markets that could result from recent developments in the gold market. The price of gold has reached record highs since 2023 and is at risk of entering a so-called gold squeeze. This could have a massive impact on the financial sector as market participants could be forced to cover short positions.

Current reports show that the outstanding derivatives volume in the euro area is now around one trillion euros, which is many times the annual physical production of gold. Forced redemption of short positions as gold prices continue to rise could lead to significant margin calls and liquidity shortages, which in turn could trigger waves of sell-offs in other asset classes. BTC ECHO reports that gold in this context has a paradoxical potential to act as a trigger for a financial market earthquake.

Market dynamics and investor behavior

Gold has established itself in the past as a safe store of value, which is particularly special in times of financial market tensions. Demand for gold, traditionally characterized by jewelry, investments and as a reserve asset for central banks, has recently risen sharply. Particularly in the turbulent markets of recent years, including geopolitical tensions and economic uncertainties, gold has once again demonstrated its role as a portfolio diversifier and inflation hedge.

One notable trend is that central banks, particularly in emerging markets, have increased their purchases of gold to hedge against geopolitical risks and possible sanctions. ECB highlights that gold often outperforms stocks and the U.S. dollar during extreme market volatility, while bond prices typically decline. Events such as the COVID-19 pandemic and the war in Ukraine show historical connections with rising gold prices in times of crisis.

Risks to financial market stability

Developments in the gold futures markets, particularly at the COMEX, highlight a growing correlation between political uncertainty and gold prices. Uncertainty has increased following the US presidential election in November 2024, affecting the outlook for gold price developments in future trade disputes. Additionally, demands for physical gold are increasing, driving up borrowing costs and futures prices.

A point of concern is the significant exposure of Eurozone investors to gold derivatives, which stands at around €1 trillion as of March 2025 - a 58% increase since November 2024. Most of their gold derivatives are traded over-the-counter (OTC) and are not centrally hedged. This increases the risk for counterparties in derivative contracts, especially in a market environment characterized by high geopolitical risks and economic uncertainty.

Overall, the ECB sees a potential threat to financial stability that could arise from the vulnerable structures of the raw materials markets. Concentrations in a few companies and excessive leverage pose serious risks that can be exacerbated by disruptions in the procurement and delivery of physical gold.