1. Inflation and central bank monetary policies
Persistent global inflation has strengthened gold’s appeal as a safe-haven asset. Despite central banks' attempts to contain inflation through rate hikes, it remained above forecasts, exceeding 4.5% in the U.S. and 3.8% in the Eurozone in the first quarter of 2025. The U.S. Federal Reserve (Fed) and the European Central Bank (ECB) maintained restrictive monetary policies, but the resilience of inflation reinforced demand for tangible assets like gold.
2. Geopolitical tensions and global uncertainty
Geopolitical tensions have also contributed to the rise in gold prices. Ongoing conflicts in the Middle East and Eastern Europe have increased demand for safe-haven assets. Additionally, rising trade frictions between China and the U.S. have revived fears of economic disruptions, prompting a reallocation of assets into gold.
3. Supply deficit and gold reserve repatriation
The gold market has also been affected by a reduction in physical supply. Several central banks, particularly in Asia and Europe, have increased their gold reserves, reducing the availability of metal on the open market. Furthermore, U.S. customs restrictions have prompted some countries to repatriate their gold, increasing logistical costs and exacerbating supply pressures.
4. Speculation and imbalances in paper gold
Another key factor has been the growing imbalance between paper gold (ETFs, futures contracts) and physical gold. Since January, short positions on gold have reached high levels, exceeding 200,000 short contracts on COMEX. This speculation has contributed to increased volatility and fueled concerns about a potential "short squeeze."
Understanding the concept of a gold short squeeze
A short squeeze occurs when an asset, in this case, gold, experiences a sharp price increase, forcing traders with short-selling positions to urgently buy back their positions. This phenomenon creates additional demand and amplifies price surges.
In the gold market, this mechanism can trigger when banks or hedge funds sell large quantities of futures contracts or paper gold without holding sufficient physical reserves to fulfill these commitments. If gold prices suddenly rise, these actors must repurchase the asset at a higher price, further driving up the price.
According to data from the Commodity Futures Trading Commission (CFTC), in January 2025, gold short positions (paper gold and futures contracts) represented nearly 220,000 contracts, equivalent to over 680 tons of gold sold short. By comparison, the official reserves of the Banque de France amount to approximately 2,430 tons. The sudden unwinding of these short positions could therefore lead to a massive short squeeze on the precious metal.
A precedent occurred in October 2024, when gold short positions were reduced by over 50,000 contracts in just a few weeks. This movement contributed to a 14% increase in gold prices, with the price per ounce rising from $1,920 to over $2,200 in one month. Some experts believe similar movements could occur in 2025.
Risks related to ETFs and paper gold
Gold-backed ETFs allow investors to gain exposure to the precious metal without holding it physically. However, several risks can arise, particularly when ETFs are not fully backed by physical gold reserves.
According to the World Gold Council, in January 2025, global gold ETF inflows reached $3.4 billion, bringing total assets under management to over $210 billion. However, some analyses suggest that the gold held by these funds may be insufficient to cover all outstanding shares.
For example, the SPDR Gold Trust (GLD), one of the largest gold-backed ETFs, held approximately 870 tons of physical gold in February 2025, while its potential commitments exceeded 1,100 tons. This imbalance poses a risk in case of high demand for ETF share conversion into physical gold.
Moreover, in the event of a financial crisis or market panic, a rush to convert ETF shares into physical gold could expose a lack of actual reserves, exacerbating volatility and creating stress in the market.
Is paper gold facing a major challenge?
Are we witnessing a fundamental shift in the paper gold market?
Some market estimates suggest the ratio between paper gold and physical gold could exceed 100 to 1, although this figure varies depending on sources and methodologies. Some analyses even suggest that this ratio could reach 200 or 300 to 1 under certain market conditions.
If paper gold investors lose confidence in their counterparties amid a physical gold shortage, we could witness a historic event in the gold market.
In such a scenario, paper gold issuers could find themselves short, unable to acquire the necessary physical gold. The recent transfer of 2,000 tons of gold to the United States in just a few weeks could already be a warning signal for market participants. An inability to deliver physical gold could trigger a crisis of confidence and spark a short squeeze.
Unlike a classic financial short squeeze, which can theoretically be absorbed by the additional issuance of securities, a short squeeze on physical gold is much more complex. Gold cannot be created digitally—it must be mined and delivered, a significant challenge in a shortage scenario.
Many indicators suggest that we may already be in such a situation. Several countries are reporting shortages, such as Japan, where some platforms have run out of bullion stocks. Metalor has imposed a surcharge due to rising supply costs. In Switzerland, the refiner Argor-Heraeus is applying a "temporary surcharge" on minted gold…
Additionally, the LBMA (London Bullion Market Association) is facing extended delivery times of 4 to 8 weeks, which could be a sign that demand is outpacing supply. This situation is raising concerns among financial institutions, which are questioning whether the gold stored in London is actually available.
Finally, the issue of gold reserve verification is resurfacing. President Donald Trump recently suggested auditing U.S. gold reserves at Fort Knox, questioning the current opacity of information and implying that a more alarming reality may be hidden.
If confidence in paper gold collapses, physical gold prices could skyrocket, marking a historic turning point in financial markets.
Commodity Futures Trading Commission (CFTC). (2025, January). Gold short positions report. Retrieved from https://www.cftc.gov
