Gold derivatives pose a risk to the world financial system, the European Central Bank said today in a commentary written by four of its economists.
The commentary, headlined "What Does the Record Price of Gold Tell Us About Risk Perceptions in Financial Markets?," comes 25 years almost to the day after a GATA delegation led by Chairman Bill Murphy presented to Congress the organization's "Gold Derivative Banking Crisis" report, making the same point with far more extensive documentation:
https://www.gata.org/files/GDBC_Report.pdf
The ECB commentary, attributed to the bank's Maurizio Michael Habib, Oscar Schwartz Blicke, Emilio Siciliano, and Jonas Wendelborn --
-- concludes:
"Gold markets appear to partly reflect elevated geopolitical risk and substantial economic policy uncertainty, with tail scenarios potentially having adverse effects on financial stability.
"While gold prices are driven by many factors, investors showed high demand for gold as a safe haven asset and, at the beginning of 2025, a notable preference for gold futures contracts to be settled physically. These dynamics hint at investors' expectations that geopolitical risks and policy uncertainty could remain elevated or even intensify in the foreseeable future.
"Should extreme events materialize, there could be adverse effects on financial stability arising from gold markets. This could occur even though the aggregate exposure of the euro-area financial sector appears limited compared with other asset classes, given that commodity markets exhibit a number of vulnerabilities.
"Such 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 over-the-counter derivatives. 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.
"Additionally, disruptions in the physical gold market could increase the risk of a squeeze. In this case, 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."
Better late than never, one may suppose. Has the ECB now earned its own tin-foil hat? Or is GATA almost respectable now?
About the author
