The push for physical gold delivery amid record prices could trigger financial instability across the eurozone if geopolitical tensions escalate, according to a study by European Central Bank economists.
The warning comes as gold prices hit record highs, trading at $3,236 per troy ounce, up 23% since January.
“Disruptions in the physical gold market could increase the risk of a squeeze,” the ECB said in its Financial Stability Review. Market participants could face significant margin calls and difficulties delivering physical gold, according to the report.
Euro area exposure to gold derivatives has reached €1 trillion, jumping 58% since November. About 48% of these contracts trade over-the-counter without central clearing, adding risk to the system.
Most concerning to ECB economists is that the majority of European banks’ gold derivatives involve non-European counterparties, creating vulnerability to external shocks.
Central banks acquired 244 tonnes of gold in the first quarter, continuing to drive demand despite a slight slowdown from previous quarters. Central banks now account for 42% of gold investment, compared to 33% for jewelry and 19% from traditional investors, according to the World Gold Council.
Fears about potential U.S. import tariffs on gold following an April 2 Trump administration announcement have disrupted markets, with London gold shipments redirected to New York and higher borrowing costs in London markets.
Major financial institutions are revising price forecasts upward. Goldman Sachs recently projected $3,100 per ounce by year-end, while UBS forecasts $2,900 with potential peaks of $3,200.
Surveys show 58% of asset managers expect gold to be the best-performing asset in a trade war scenario, reflected in gold ETF inflows that doubled investment demand to 552 tonnes in Q1.
Despite limited overall exposure in the European financial sector, the ECB warns that gold market concentration, leverage and opacity could trigger liquidity stress with potential systemic effects beyond gold itself.
“Gold markets appear to partly reflect elevated geopolitical risk and substantial economic policy uncertainty,” wrote ECB economists Maurizio Habib, Oscar Schwartz Blicke, Emilio Siciliano and Jonas Wendelborn, adding that extreme scenarios could have “adverse effects on financial stability.”
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