BREAKINGVIEWS-Options muddy gold’s value as gauge of global risk

By Jon Sindreu and Yawen Chen

LONDON, Feb 2 (Reuters Breakingviews) - Gold is having one of its sharpest price drops in years. What passes for a rationale behind the selloff, which has spread to other metals, is that potentially orthodox policies advanced by President Donald Trump's pick to lead the Federal Reserve, Kevin Warsh, may slash the appeal of precious metals as insurance against a world of debased currencies. Given Warsh's less-than-peerless record of independence, it makes more sense to think that the vagaries of options markets are messing with gold's role as a barometer of geopolitical strife.

One clue lies in the Cboe Gold Volatility Index .GVZ, which uses options on the SPDR Gold Shares GLD.P (GLD) exchange-traded fund to gauge the level of gold price volatility over the next 30 days. This recently closed above 44. It only reached similar levels during the 2008 global financial crisis and the 2020 Covid-19 crash.

Just as buying insurance against tornadoes shouldn’t create more tornadoes, gold options should theoretically track rather than influence gold prices. Yet over the past year investors have bought oodles of “call” options on GLD, meaning they're betting on price rises. They've also bet on silver spikes via the iShares Silver Trust SLV.P (SLV) fund. Their counterparties — banks — are thus exposed to a fall in prices. The financial firms buy metal futures or ETF shares to hedge themselves. Once this happens it only takes a relatively minor tremor to snowball into a huge selloff, as options traders rush to adjust positions and banks become sellers.

This feedback loop resembles the infamous “gamma squeeze” that “meme stock” Reddit traders chased by buying GameStop shares in 2021. It also echoes, albeit in a different form, the “volmageddon” that tanked the S&P 500 Index .SPX in 2018. Stock markets are already familiar with these flows: U.S. blue‑chip options activity went from roughly $0.5 trillion in notional daily volume in 2020 to almost $3.5 trillion in 2025, according to Cboe.

There’s strong evidence that the same has happened with precious metals, where option trading has also increased. The 44-level reached by the Cboe Gold Volatility Index last week represented a new record when compared with both the actual volatility of gold and the implied volatility of the S&P 500 Index. Also, implied volatility was already rising before the actual gold rout without the losses on the underlying asset that should sometimes accompany such a move. That all pointed to frenzied "call" option buying amplifying matters.

Among the lessons that options-stricken equity markets have to offer gold buyers, the main one is that selloffs driven by such market distortions don’t tend to be long-lasting. Indeed when implied gold volatility rises above 40%, gold is on average 10% higher three months after, an analysis by Breakingviews shows. Of course, it may not work out so neatly this time given how far prices have already risen. Regardless, observers who insist on using gold prices to explain geopolitical events are increasingly talking nonsense.

Follow Jon Sindreu on X and LinkedIn and Yawen Chen on Bluesky and LinkedIn.

CONTEXT NEWS

Spot gold fell 6.1% to $4,565.79 per ounce by 0726 GMT on February 2, after shedding more than 9% on January 30 in its sharpest one-day drop since 1983.

The metal has lost more than $1,000 since hitting a record high at $5,594.82 on January 29, erasing most of this year's gains.