Driven by geopolitical risks, the price of gold is racing from one record high to the next. Is the boom in precious metals becoming a risk for banks?
Tass / Imago
«In God We Trust» is the official slogan of the United States. It appears on all banknotes and most coins in the country. For investors around the world, however, the credo is: «In gold we trust.» That faith has been on full display in recent months, as the price of the precious metal has surged from one record high to the next, fueled by mounting geopolitical uncertainty.
On April 22, the price of gold hit an intraday record high of $3,500 per ounce. It currently trades at around $3,4o0. That marks a gain of roughly 30% since the beginning of the year – and about 65% since the start of 2024. This means that gold has significantly outperformed many other asset classes, such as most stock indexes.
Fault lines in commodity markets
Amid the current gold rush, the European Central Bank (ECB) has issued a warning about the risk of turbulence in financial markets. In the latest Financial Stability Report, ECB economists conclude in a brief analysis that gold markets could become a source of broader market disruptions in the event of extreme geopolitical and economic policy events.
The reason, according to the ECB, is that commodity markets exhibit several structural weaknesses. These include a high concentration among a few large companies, heavy use of leverage, and a lack of transparency due to over-the-counter trading.
In extreme scenarios, heavily exposed market participants could face significant margin calls. Or they could encounter difficulties in procuring and transporting physical gold for delivery under derivative contracts, potentially incurring steep losses.
One factor fueling the ECB’s concern is investors’ preference for gold contracts that require physical delivery. That means actual shipments of the precious metal – often across continents. According to the ECB, the number of contracts registered for delivery has reached record highs. In January 2025, they were at their highest level since mid-2007.
Banks face heavy losses in the event of supply bottlenecks
Under normal conditions, buyers of such contracts have no interest in taking physical delivery of the gold. Instead, they speculate on price movements or use the contracts to hedge existing positions. Accordingly, they typically sell the contracts before the end of the term and buy new ones if necessary.
However, if a large number of market participants – for example, traders acting on behalf of a hostile state – were to insist on physical delivery, investment banks would be forced to source large amounts of gold on short notice. This could trigger shortages and drive up the price of gold, potentially leading to losses for the banks.
Although the ECB economists do not explicitly name the banking industry, they are clearly directing their comments at this sector in particular. According to the central bank, investors in the eurozone have significant exposure to gold through derivatives, often involving foreign counterparties. In March, the gross value of such transactions reached 1 trillion euros – an increase of nearly 60% in just five months. However, the derivatives market is highly opaque, which fuels uncertainty. At the same time, half of all gold derivative contracts involve a bank as counterparty. Other counterparties include investment funds or financial institutions such as hedge funds.
Gold is moving from London to New York
This has not dampened the gold rush on the financial markets. This year, trade uncertainty fueled by U.S. tariff threats has triggered sharp swings in the price of the precious metal, pushing demand for gold even higher. Among other effects, it has sent futures prices climbing.
At the same time, physical gold has been moving in greater volume from London to New York. The shift has been driven partly by traders looking to get ahead of potential U.S. import tariffs on gold and partly by a modest price premium in New York over the London market. In global gold trade, physical gold for wholesale transactions is typically stored in London, whereas gold futures contracts are traded on the New York Stock Exchange Comex. The prices are usually almost identical.
However, the situation has now calmed down again, as there are currently no tariffs on gold imports. However, ECB economists fear that extreme scenarios could arise in the future in which stress in the gold market could lead to turbulence in other markets.
Gold price races to new record highs
The price of gold has seen an unprecedented rise since 2023, with a series of record highs, even though the precious metal does not yield dividends or interest compared to stocks and bonds. Gold, on the other hand, has the advantage of a centuries-old tradition as a safe store of value and does not carry any counterparty risk. It is considered a safe haven in times of high geopolitical, financial or economic risks, when stocks and bonds tend to fall.
In recent months, uncertainty has increased significantly due to the election of Donald Trump as U.S. president in November 2024. For example, the Federal Reserve Bank of St. Louis’ Economic Policy Uncertainty Index has undergone wide swings since the end of 2024. According to surveys conducted in February and March of this year, nearly 60% of asset managers surveyed expect gold to be the most profitable asset class in the event of a serious trade war.
Purchases by global central banks also contributed to the sharp rise in the price of gold in recent years. They have acquired over 1,000 tons of gold per year since 2022. In contrast, they purchased significantly less gold between 2010 and 2021, averaging 480 tons. According to observers, an important factor here is that the so-called BRIC countries, namely Brazil, Russia, India and China, want to become less dependent on the dollar and are therefore shifting their reserves into gold. The whole world closely followed the sanctions imposed by the West in response to Russia’s invasion of Ukraine.
Recently, fears of a recession combined with rising inflation in the U.S. due to the Trump administration’s economic policies have further fueled demand for gold. According to the World Gold Council, purchases of index funds increased more than tenfold to 226 tons. Private customers in Europe and China, as well as private and institutional customers in the U.S., are said to have driven this demand.
Investment in bars, coins and certificates
Private investors can purchase gold either by buying bars and coins directly or by investing in exchange-traded commodities (ETCs). The latter are a special type of certificate. Bars and coins are particularly suitable for investors seeking long-term diversification of their portfolios and protection against geopolitical and economic risks. Bars and coins can usually be purchased from local banks or well-known gold dealers such as Degussa, Pro Aurum and many others.
For those looking to speculate on short- to medium-term price movements, exchange-traded certificates may be the better choice. Investors can also purchase shares in mining companies whose share prices tend to move in line with the price of gold.
In Germany, private investors can purchase up to 2,000 euros worth of gold anonymously with cash. If the purchase price exceeds this amount, retailers are required by the Money Laundering Act to verify the identity of the customer. In Austria, the threshold is 10,000 euros, and in Switzerland, it is 15,000 Swiss francs.
You can follow the Frankfurt business correspondent Michael Rasch on the platforms X, LinkedIn and Xing.
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