Gold experienced one of its most severe price drops in years last Friday and Monday. The market's rationale was that Kevin Warsh, President Trump's nominee for Federal Reserve Chair, might pursue orthodox policies, thereby diminishing the appeal of precious metals as a hedge against currency devaluation; this selling pressure has since spread to other metals. However, analysis suggests a more plausible explanation may be that the unpredictability of the options market is disrupting gold's role as a barometer for geopolitical conflict. One clue lies with the Cboe Gold Volatility Index, which uses options on the SPDR Gold Trust (GLD) ETF to gauge expected gold price volatility over the next 30 days; this index recently closed above 44. Such levels have only been seen during the 2008 global financial crisis and the 2020 COVID-19 market crash. In theory, gold options should track, not influence, the spot price. Yet, over the past year, investors have purchased massive quantities of GLD "call" options, meaning they were betting on price increases. They also placed bets on a silver surge via the iShares Silver Trust (SLV) fund. Their counterparties, the banks, were consequently exposed to the risk of falling prices. Financial institutions hedge this risk by purchasing metal futures or ETF shares. Once this occurs, even a relatively minor market shock can snowball into significant selling pressure, as options traders scramble to adjust their positions and banks turn into sellers. Analysis indicates this feedback loop resembles the infamous "Gamma squeeze" triggered in 2021 by Reddit retail traders buying GameStop stock. It also echoes, in a different form, the 2018 "Volmageddon" that led to a sharp decline in the S&P 500 index. US equity markets have become accustomed to these capital flows. According to Cboe data, the daily notional trading volume of options on US blue-chip stocks has surged from approximately $0.5 trillion in 2020 to nearly $3.5 trillion in 2025. Strong evidence suggests a similar dynamic is occurring in precious metals, where options trading volume has also increased. The Cboe Gold Volatility Index's level of 44 last week set a new record compared to both gold's actual volatility and the S&P 500's implied volatility. Furthermore, implied volatility began rising before the actual gold price plummeted, without the usual losses in the underlying asset that typically accompany such moves. All of this points to frenzied "call" option buying exacerbating the situation. Among the lessons for gold buyers from the options-influenced equity market, the primary one is that selling driven by such market distortions tends not to last very long. In fact, analysis shows that when gold's implied volatility rises above 40%, the gold price has historically increased by an average of 10% three months later. Of course, given how much gold prices have already risen, the outcome this time might not be as straightforward.
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