Gold markets may become a source of risk to the financial stability of the euro area in the event of geopolitical tensions. As the European Central Bank said in a note published by four of its economists.
The increased demand for physical delivery, the dominance of large traders and the lack of transparency in transactions create a complex landscape of vulnerability. Especially when things do not go smoothly. This analysis is part of a broader risk report.
«If extreme events were to occur, it is possible that gold markets could have adverse effects on financial stability.» As the authors point out. «The vulnerabilities are due to the concentration of commodity markets in a few large firms. But also to the use of leverage and high opacity due to OTC derivatives.».
Record prices, Trump tariffs and panic moves
The price of gold soared to historic levels, surpassing $3,500 per ounce last month. After US President Donald Trump imposed global tariffs. Although since then the price has fallen, last week recording its biggest weekly loss since November. But instead, ECB economists are identifying persistent concerns.
«Margin calls and the clearing of leveraged positions can cause liquidity pressures on market participants. But they can also transmit shocks to the wider financial system,» they note. «In addition, disruptions in the physical gold market increase the risk of shortage (squeeze) effects.».
Expectations of Trump's tariffs had already caused congestion in the Bank of England's vaults earlier this year. While it increased Switzerland's trade surplus with the US because of the need to process and reformulate gold bullion being shipped from London to New York.
The ECB's own economists - Maurizio Michael Hubbard, Oscar Schwartz Blicke, Emilio Siciliano and Jonas Wendelborn - warn that delivery problems could be a future source of instability.
«Market participants may be required to cover significant margins of safety and/or face difficulties in sourcing and transporting physical gold to fulfil derivatives contracts, exposing them to potentially large losses,» they conclude.
Source: newmoney.gr
