ECB | Concerns about rising demand for gold

The European Central Bank (ECB) is not known for its alarmism. However, as the central institution of the eurozone, the bank is also responsible for overseeing the financial stability of the countries concerned and of the entire eurozone. The statement that the ECB circulated in mid-May as a spin-off from its monthly report on financial stability falls precisely into this area. It addresses the gold price, geopolitical uncertainties, and—this is the remarkable thing—"extreme scenarios with potentially negative implications for financial stability."

Specifically, the EU monetary authorities see a problem in excessive amounts of European gold derivatives. These are financial instruments whose value is derived directly or indirectly from the gold price. They allow investors to participate in the development of the gold price without having to own physical gold. Derivatives are typically used to diversify portfolios or hedge against market fluctuations – without the holders of the bond actually seeking physical delivery.

By March of this year, positions in gold derivatives totaling around one trillion euros had accumulated in the Eurozone. At a gold price of $3,200 per troy ounce, this corresponds to three times global annual production. Since November 2024, this amount has increased by around 58 percent; approximately 48 percent of the derivatives are held outside of Europe. According to the ECB, this makes them vulnerable to exogenous shocks. These have recently increased, which has also led to an increase in demand for gold, particularly from central banks .

The BRICS countries (Brazil, Russia, India, China, South Africa) and several others in particular are filling their vaults in an effort to become more independent from the dollar as the world's reserve currency . The Chinese central bank, for example, acquired more than 200 tons of the precious metal in 2024 alone and continued to increase its reserves this year. At the same time, the People's Republic's central bank, in contrast, has reduced its holdings of US Treasury bonds—of which it was previously the largest holder. Clear signs of progressive unbundling.

Since gold is considered a crisis currency, its price is likely to continue rising as turmoil increases. The number of physically delivered ounces has risen over the course of the year. More and more holders of gold "delivery promises" are honoring these and not reselling their claims. It cannot be ruled out that many holders of European derivatives will have their gold delivered in the future. Or rather, they will want to have it delivered. Because – this is the essence of the ECB's warning – in such a case, supply bottlenecks could arise.

The consequences could be significant, even though the gold market, with its estimated capitalization of €22.71 trillion, is relatively small compared to the stock market. This is a crucial point: Many gold derivatives are traded over the counter, meaning not on an exchange or other trading venue. Trading is correspondingly less transparent. In addition, there are so-called leverage factors, where positions rise or fall by double or triple the price movement of the underlying commodity.

Strongly fluctuating prices and supply bottlenecks in physical gold could lead to disruptions in the financial system and "potentially large losses," as ECB officials put it. This could ultimately lead to bank failures and have far-reaching effects on the real economy.

Whether this will happen is currently speculative. However, the ECB's warning indicates the seriousness of the problem. Finally, it is possible—and this is also purely speculative—that actors outside Europe will exploit the obligations of European banks to cause disruptions in the financial markets.