This year, stock market volatility has been significantly lower than in almost all other markets, while volatility in precious metals, currencies, and commodities has been much greater. In the first month of 2026, despite persistent concerns about an artificial intelligence stock bubble, genuine market turbulence occurred elsewhere. Gold prices surged to record highs, only to experience their largest single-day drop since the 1980s last Friday. The US dollar fell to its lowest level since the market plunge triggered by April's tariffs, fueled by speculation about US intervention to strengthen the Japanese yen, while unsettling traders with remarks about acquiring Greenland. Crude oil prices jumped to their highest level since August. Yet, concurrently, the CBOE Volatility Index (VIX) remained below its average level over the past year.
Mandy Xu, Head of Derivatives Market Intelligence at CBOE Global Markets, stated, "Geopolitical risks are the primary drivers of the current uptick in market volatility—this is evident from the significant movements in gold, oil, and foreign exchange markets relative to other asset classes. Stock market volatility is primarily manifesting at the individual stock level, with the VIX currently reflecting little macro risk." Supported by policies that have disrupted the international order and attacked the Federal Reserve's independence (leading to a weaker US dollar), gold prices have surged powerfully this year. Even after a 9% drop last Friday, gold still posted its largest monthly gain since 1999, with its absolute price, ETF call option volume, and volatility relative to stocks all hitting record highs.
A proprietary bubble risk indicator from Bank of America has reached extreme levels, derivative strategists wrote in a report, adding that such levels have historically been associated with significant volatility. While index volatility remains subdued, the situation at the individual stock level is starkly different—Microsoft Corp. (MSFT.US) shares fell 10% after reporting record expenditures and slowing cloud sales growth. This divergence in individual stock performances lowers correlation, thereby suppressing broad volatility measures.
Xu commented, "Equity investors remain focused on earnings and the sustainability of the AI trade; stock dispersion is high, and implied correlation remains near historic lows." In contrast, gold's rally exhibits a so-called "vol-up/spot-up" dynamic, similar to the movements seen in AI and other frothy stock market sectors. Traders fearing they might miss the next leg up have poured substantial funds into gold-tracking Exchange-Traded Funds (ETFs). The SPDR Gold Trust (GLD) alone has accumulated over $20 billion in the past eight months.
In fact, due to the magnitude of the gold price increase and the potential for a pullback, the precious metal is no longer being viewed purely as a safe-haven asset: last week, GLD's implied volatility relative to the S&P 500 hit a record high. Data shows strong demand for call options is evident in its skew, which has soared to its highest level in the past year after normalization. Metal prices declined and market volatility remained elevated following the nomination of Kevin Warsh for Federal Reserve Chair.
Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, said, "This seems like a decision unlikely to overheat the market, which is clearly the reason for the precious metals sell-off. If you ask me whether a daily surge in gold is scarier or a consolidation phase after a big rally is scarier, in terms of actual risk, I think the daily surge is scarier." Some funds have been using binary options and hybrid options to bet on the relationship between gold and equities.
Neeraj Chaudhary, Head of EMEA Exotic Options & Flow and Global Co-Head of Hybrid Options Trading at Bank of America, noted that while the correlation between gold and stocks has historically hovered near zero due to gold's safe-haven status, it has recently edged slightly higher as money flows into both assets. Chaudhary stated that trading gold's rise alongside the USD/JPY exchange rate has become one of the hottest strategies, adding that institutional investors have been active in trades betting on rising gold prices/rising JPY rates and rising gold prices/rising USD rates.
Traders are betting on expanded currency volatility. Implied volatility for USD/JPY spiked after the New York Fed conducted a rate check and following remarks that he did not believe the dollar's value had fallen significantly, causing the USD/JPY rate to drop over 4% in just a few days. Although the Warsh nomination appears to have deflated the gold and silver bubbles previously inflated by expectations of a weaker dollar, the bond market's reaction has been calmer.
Investors have been content to sell volatility on long-term US Treasuries through equity options on the iShares 20+ Year Treasury Bond ETF. Murphy said the Warsh nomination "removes some potential two-way volatility in long-term rates," causing those with differing directional bets on rates to step back. Similarly, analysis points out that options on the Secured Overnight Financing Rate (SOFR) suggest a narrowing window for US interest rate cuts.
Despite implied volatility sitting at multi-year lows, even lower realized volatility continues to entice selling. Throughout this period, the VIX has remained relatively stable. While a steeper put skew and sporadic call buying indicate some investors might be hedging, the term structure for S&P 500 options remains in contango, suggesting little near-term concern from other markets.
Murphy concluded, "I don't think the precious metals crash has much impact on the stock market. US megacaps have been engaged in a 'tug-of-war,' pulling the S&P 500 in different directions, while the index itself hasn't moved much."
Comments