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Editor’s note: This article was updated to include comments from Joseph Cavatoni from the World Gold Council.

(Kitco News) – Gold continues to reestablish its role as a global monetary asset, and the yellow metal is attracting the attention of the European Central Bank.

In a paper published on Monday, the ECB acknowledged gold’s safe-haven appeal amid rising economic volatility and geopolitical uncertainty.

“Unlike most bonds and equities, it does not provide cash flow,” the analysts said in the paper.
“Instead, its appeal reflects two unique features, particularly in times of high uncertainty. First, it is not a liability of any counterparty and thus carries no default risk. Second, given its limited and relatively inelastic supply, it retains its intrinsic value and cannot be debased. Accordingly, gold is often seen as a portfolio diversifier, a hedge against inflation and US dollar depreciation, and a safe haven in times of severe financial market or geopolitical stress.”

The ECB also noted that, over the past 30 years, gold has outperformed equities, the U.S. dollar, and bonds during periods of stress. However, the research shows that gold performs best during times of heightened geopolitical risk or elevated economic policy uncertainty.

The ECB further highlighted significant trade flows in gold, noting that large amounts of the metal were moved into New York vaults as bullion banks prepared for President Donald Trump’s global tariffs. It was initially unclear whether gold and silver would be tariffed alongside other imports, but precious metals were ultimately exempted from U.S. tariffs.

The ECB paper also pointed out that these inflows into the U.S. caused significant disruptions in European markets, as futures prices rose substantially above cash prices in London.

“As a result, the costs of borrowing and sourcing g old in the London market increased. Sudden market stress and disruptions to sourcing, shipping and delivering physical gold in derivatives contracts raise the question of whether counterparties obliged to deliver physical gold could be at risk of incurring increased margin calls and suffering losses,” the paper said.

The ECB further noted that investor exposure to gold and derivatives has grown significantly this year.

“In the euro area, gross notional exposures to gold derivatives amounted to €1 trillion in March 2025, an increase of 58% since November 2024. A significant share of these derivatives contracts are traded over-the-counter (OTC) and are not centrally cleared. Approximately 48% of gold derivatives contracts have a bank counterparty. The majority of euro area banks’ gold derivatives exposures are with non-euro area domiciled counterparties, suggesting some exposure to external shocks in the gold market,” the paper said.

The liquidity squeeze in cash markets at the start of the year, coupled with growing exposure to gold, led the ECB to its main conclusion: higher gold prices could pose a risk to European financial market stability.

“Should extreme events materialise, 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 OTC 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,” the paper said.

Analysts say risks to financial stability from gold are overstated

While the ECB highlights growing risks in the marketplace, some fund managers and market analysts believe the threat could be exaggerated.

Axel Merk, President and Chief Investment Officer at Merk Investments, said in a comment to Kitco News that while gold prices have been more volatile in recent months, the market has functioned well and remains liquid.

Merk also noted that, despite the volatility, gold generally experiences less fluctuation compared to other markets.

“Unlike derivatives on interest rates, though, leverage is far less; also, the risks are well understood, not only by regulators, but also by market participants. Exchanges routinely increase margin requirements when volatility rises,” he said. “The recent episodes showed markets have worked well. The volatility was appropriate because reasonable people assessed outcomes to be different. And the leverage was taken down. We are currently in a phase where hedge funds appear to re-lever. The author may not like that, and I don’t think it’s necessarily prudent, but that doesn’t mean the financial system is at risk because of that. It’s how markets work.”

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said these risks in the gold market are nothing new.

“When we are dealing with physical commodities with finite supply, any sudden change in the demand/supply structure may cause stress to the system, as we have seen on numerous occasions throughout history. The main point is whether it erodes gold’s value as a store of value, and the answer to that is a solid no,” he said.

Despite the evident risks in the marketplace, some analysts see the ECB’s report as a broader commentary on gold’s role in financial markets. Ronald-Peter Stöferle, Managing Partner and Fund Manager at Incrementum AG, said that the remonetization of gold is no longer a fringe theory — it’s becoming mainstream policy.

“The ECB now highlights rising gold demand amid geopolitical uncertainty. That aligns seamlessly with our core thesis in the IGWT report: gold is regaining its monetary relevance — not by decree, but by demand,” he said in a comment to Kitco News. “As trust in fiat frameworks declines, gold quietly resumes its role as the anchor of stability. The ECB’s recent remarks show that even central banks are beginning to hedge against the system they helped build.”

Gold is a deep and liquid market and can handle higher volatility – World Gold Council

Joseph Cavatoni, Senior Market Strategist at the World Gold Council, told Kitco News that the ECB paper contributes to the ongoing conversation about gold’s role as a global monetary asset.

He noted that gold is one of the largest markets in the world, with an average daily trading volume of around $165 billion—second only to S&P 500 futures.

“This scale helps diffuse concerns about liquidity strain. In times of stress, gold consistently demonstrates resilience, as shown in historical data during events like the dotcom bubble and, most recently, the COVID-19 pandemic. When we analyze gold’s performance, we find it holds up, remains liquid, and acts as a robust hedge,” he said. “Notably, we observed no significant disruptions in price movements even during tariff-related concerns over the past six months. These characteristics reinforce gold’s role as a strategic asset in volatile periods.”

The ECB’s comments come as the World Gold Council and the London Bullion Market Association continue their efforts to have gold recognized as a top-tier, high-quality liquid asset (HQLA).

Analysts from the two organizations published a paper earlier this year arguing that gold should be classified as an HQLA, citing its performance during broad market liquidity events and periods of economic volatility and uncertainty.

ECB highlights gold’s increasing risks, analysts say threat is overstated

ECB highlights gold’s increasing risks, analysts say threat is overstated

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