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Gold is considered a safe haven for investors. As a result, its price has continued to rise steadily in recent months. Yet the very characteristic that makes gold a precious metal – its scarcity – is now becoming a risk. “Delivery bottlenecks could lead to panic reactions and losses running into billions,” warns Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. Investors should therefore exercise caution.

Rising global uncertainty and gold purchases by central banks are fuelling demand for the precious metal. Its price is now around one-third higher than a year ago and two-thirds higher than three years ago. Particularly sought after are financial instruments that involve actual delivery of physical gold rather than just a cash settlement. However, this strong demand comes with risks: in its latest Financial Stability Review, the European Central Bank (ECB) warns that the volume of gold delivery obligations for January 2025 has reached a new record high – similar to levels seen before the 2007 financial crisis. This is leading to shortages in the physical availability of the metal.

Another warning sign is the increased transport of gold between major trading hubs. London, traditionally a key storage location, is seeing outflows. US investors are willing to pay higher prices in New York, with premiums occasionally exceeding 50 US dollars per ounce. These price differences are enabling arbitrage trades by major banks specialising in the trading, storage, and settlement of precious metals, often involving complex hedging strategies. The risk here: if the gold cannot be delivered on time, significant losses may occur.

Geopolitical tensions can also further increase demand for gold. If, for example, Russia were to request large volumes of physical gold via third parties, this could exceed the delivery capacities of international banks. The result could be price spikes and panic in the financial markets. At the same time, China continues to expand its gold reserves in a bid to reduce its dependence on the US dollar.

According to the ECB, the greatest danger lies in a short squeeze: investors bet on falling gold prices and sell short without owning the metal. If, contrary to expectations, the price rises, short-sellers are forced to buy gold to limit their losses. “If physical delivery cannot be made on time, expensive repurchases become unavoidable,” explains Fischer. For banks, this can mean losses running into billions and, in the worst-case scenario, insolvencies. Particularly problematic is the fact that many of these transactions are conducted over the counter (OTC), making it harder for regulators and market participants to assess overall risk exposure.

What does this mean for financial advisers and their clients? “Products with claims to physical delivery should be analysed carefully,” says Fischer. Anyone who wants to hold physical gold should own it directly – not just on paper. It is also essential to clarify where the gold is stored, who guarantees delivery, and how quickly it can be accessed. “These are crucial questions when selecting investment products,” Fischer adds. Complex derivatives – especially over-the-counter products – should be avoided. If they are used, their structure and collateral must be clearly understood. Timing is also critical: during periods of geopolitical tension or tight markets, physical gold may be difficult or expensive to obtain at short notice. “Long-term planning,” says Fischer, “is key.”

As a portfolio diversifier, gold continues to make sense – not least as a hedge against inflation and currency weakness. “The ECB’s warning is a wake-up call for greater transparency, caution with derivatives, and strategic foresight – for both institutional and private investors,” concludes Fischer.