The European Central Bank (ECB) has warned that the global gold market’s concentration, opacity, and reliance on over-the-counter (OTC) trading could pose risks to financial stability during extreme events.

In an opinion piece written by Bernhard Schnellmann for the Financial Times (FT), he mentions that in a recent report, the ECB noted that vulnerabilities have emerged because commodity markets are dominated by a small number of large firms, often involve leverage, and rely heavily on opaque OTC derivatives. He explained that the bank cautioned that disruptions in the physical gold market could increase the risk of a market squeeze.

According to the FT report, the ECB’s warning comes amid growing scrutiny of the institutions that underpin the world’s largest OTC bullion market.

At the center are the London Bullion Market Association (LBMA), a private trade body setting global gold standards, and London Precious Metals Clearing Limited (LPMCL), a private consortium handling trade settlement. While both exercise significant influence over the market, used by central banks, sovereign wealth funds, and retail investors, neither has formal regulatory authority, Schnellmann stated. 

The LBMA’s "Good Delivery" standard requires bars to weigh about 400 troy ounces with a minimum fineness of 995 parts per thousand. While efficient for institutional vaulting, these bars do not match the kilobar demand in Asian consumer markets.

According to the FT report, this mismatch forces Swiss refiners to import 400-ounce bars from London, remelt them into kilobars, and reverse the process when demand drops, an operation criticized as both economically inefficient and environmentally questionable.

Centralization and chokepoint risks

London’s concentration of gold vaulting infrastructure, much of it within reach of the Bank of England, creates a potential chokepoint. Schnellmann argues that in times of heightened trading or supply chain disruption, liquidity could be constrained, yet the structure of the market has remained largely unchanged.

The report mentions that the LBMA and LPMCL operate with significant authority, determining eligibility, access, and settlement terms in a market critical to global finance. However, the lack of formal accountability raises concerns over dispute resolution and systemic resilience in times of crisis.

The ECB urged a reassessment of gold market governance, suggesting that the Bank for International Settlements (BIS) could oversee key elements of clearing, settlement, and vaulting. Additionally, the BIS already serves as custodian for many central banks’ gold reserves and has a neutral legal status under international law.

Such a reform would not replace the LBMA’s role in setting technical standards but would transfer oversight of market infrastructure to an institution with a global legal mandate, aligning the gold trade with other regulated financial systems.

According to Schnellmann, Gold remains a cornerstone of financial security for both institutions and individuals, but the system that supports its trade has lagged behind the globalization and digitization of financial markets.

As central banks continue to expand their gold holdings, analysts warn that leaving market governance entirely in the hands of private institutions could amplify risks during periods of geopolitical tension, cyber threats, or liquidity stress.