Major resistance emerges in gold's uptrend: European Central Bank warns that the gold market may pose a threat to financial stability in the eurozone.

Economists at the European Central Bank have released a new research report showing that the gold market may become a core source of financial stability risk in the Eurozone under geopolitical pressure. If things go wrong, factors such as increasing demand for physical delivery, dominance of large traders, leverage, and opacity in some large trades could pose a threat to the overall financial system of the Eurozone. Four economists at the European Central Bank wrote in a research report released on Monday, which will be included in a larger risk report to be published on Wednesday. The European Central Bank's team of economists unexpectedly discovered the vulnerabilities of the gold market, including concentration in a few large companies, leverage, and opacity in over-the-counter derivatives, which could lead to liquidity pressures and contagion. Delivery issues could be a source of future financial market pressure, as market participants face additional margin calls, difficulties in finding and transporting physical gold for delivery in derivative contracts, leading to significant losses. "If extreme events occur, the gold market could have adverse effects on financial stability in the Eurozone," the economists wrote. "The vulnerability of the gold market stems from the fact that the entire commodity market often focuses on a few large companies, typically involving high leverage, and is highly opaque due to the use of certain over-the-counter derivatives." Due to the impact of the global tariff policies led by US President Donald Trump, gold prices soared last month under increasingly strong safe-haven sentiment worldwide, breaking through a record high of $3,500 per ounce. However, it has since fallen continuously, with last week marking the largest weekly decline since November. The economists at the European Central Bank pointed out potential concerns that could hinder a rebound in gold prices - when policy makers at the European Central Bank recognize that the gold market could jeopardize financial stability in the Eurozone, there may be a significant sell-off of gold at some point to obtain euros or dollars to maintain the stability of the euro exchange rate. On Monday, gold rebounded slightly above $3,240 per ounce after experiencing its largest weekly decline in six months, driven by increasing concerns about the US economic outlook and budget deficit. Last Friday, Moody's downgraded the US government's credit rating, losing its only AAA rating among the three major credit rating agencies, citing huge fiscal deficits and rising interest costs. Last week, gold prices plummeted by more than 3%, marking the worst weekly performance since November, as the risk appetite expanded due to the positive consensus between China and the US at the trade level, causing the gold market to continue its downward trend. "The expansion of margin calls and the unwinding of leveraged positions may lead to liquidity pressures on major market participants, and then spread this negative impact to a broader financial system," the economists at the European Central Bank wrote. "Furthermore, supply chain disruptions in the physical gold market may increase the risk of forced liquidations." Due to expectations that Trump will impose tariffs globally, earlier this year, US demand for the precious metal caused congestion in the Bank of England's gold vaults, leading to a surge in Swiss trade surplus with the US, as gold bars flowing from London to New York need to be refined in Swiss refineries. These gold bars do not go directly to New York, but are first shipped to Swiss refineries, where they are re-melted into 1 kg gold bars - the standard official delivery specification for Comex exchange futures contracts in New York. "The demand for kilo gold bars - not just us, the entire industry is increasing," Robin Commerbach, CEO of precious metals refiner Argor-Heraeus, recently stated. In the future, as supply and demand become increasingly imbalanced, issues with physical gold delivery could become a core source of market trading pressure, as stated by economists at the European Central Bank in the report. The economists who wrote this study are Maurizio Michael Habib, Oscar Schwartz Blicke, Emilio Siciliano, and Jonas Wendelborn. "Market participants in the gold market may face substantial additional margin calls due to some extreme events, or may find it difficult to find and transport compliant physical gold for delivery in precious metal derivative contracts, exposing them to potentially significant widespread losses," they wrote.