On Friday, spot gold saw an intraday decline approaching 13%, marking its most significant single-day drop in over forty years since the early 1980s, exceeding the declines witnessed during the 2008 financial crisis. Spot silver plunged by over 35% at one point during the session, setting a record for its largest-ever decline. Professionals believe that trading in the options market further amplified the price volatility. Market participants pointed out that behind this sharp decline in gold, the "gamma squeeze" effect may have played a contributing role. A gamma squeeze refers to a situation where options market makers, holding substantial short option positions, are compelled to buy more futures or ETF shares to maintain delta neutrality when prices rise, and conversely sell when prices fall, thereby exacerbating pro-cyclical market movements. Aakash Doshi, Global Head of Gold and Metals Strategy at State Street Global Advisors, stated, "This is likely a gamma squeeze resulting from market maker hedging. Over the past few weeks, investors heavily purchased near-month call options, driving up short-term demand. When spot price momentum accelerated upwards, market makers' hedging operations may have further propelled gold prices into a parabolic surge." Doshi believes that as the month-end approaches and following the announcement by Donald Trump nominating former Federal Reserve Governor Kevin Warsh for the next Fed Chair, this options-driven rally is undergoing a rapid "unwinding," leading to a sharp correction in gold prices. The options open interest structure also indicates concentrated expiry pressure at key price levels. The SPDR Gold Trust ETF (GLD.US) had a significant volume of options expiring near the $465 and $455 strike prices on Friday; similarly, in the COMEX gold options market, the March and April contracts saw substantial open interest clustered around the $5300, $5200, and $5100 levels. Although technical indicators suggest gold prices might have further room to decline, Doshi noted that from a structural allocation perspective looking towards 2026, this round of correction might instead present a buying opportunity, stating that "the long-term allocation advantages of gold have not disappeared." It is noteworthy that options traders have not entirely exited the market. The one-month implied volatility for GLD and the iShares Silver Trust ETF (SLV.US) remains elevated, indicating that expectations for future sharp price fluctuations are still strong. Mandy Xu, Head of Derivatives Market Intelligence at the Cboe, mentioned that despite the significant drop in gold prices that day, bullish bets in the options market actually increased. The skew for GLD options became more inverted, with investors ramping up purchases of call options betting on a rebound. In the COMEX market, investors traded approximately 1,500 "year-end call spreads," wagering that gold prices could see a significant recovery in the future. Earlier in the week, similar bullish trades saw turnover exceeding 5,500 contracts. Simultaneously, a very large long-term transaction occurred in the SPDR Gold Trust ETF, where capital was heavily deployed in options expiring in January 2027, involving both the purchase of protective put options and the sale of additional put contracts. The overall strategy is likely a preparatory move for the risk of continued gold price declines over the next one to two years.
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