During the worst day for gold in 46 years, options traders made bets the metal could hit $20,000

By Jules Rimmer

Friday's shakeout was all about positioning; options markets suggest traders are still bullish, says SocGen

Gold prices fell more than 10% on Friday but the move was more about positioning than fundamentals, maintains SocGen.

When gold was plunging on Friday in its worst day in 46 years, some investors took out options bets that the yellow metal could reach $20,000.

An analysis from Societe Generale's commodities team, led by Mike Haigh, found options trades that gold could reach $10,000, $15,000 and $20,000 an ounce, by the end of the year.

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After last week's shakeout, gold futures (GC00) on Tuesday were trading up 6%, to $4,925.80 an ounce.

There was also an increase in put options struck at $4,000 but notably fewer extreme bets, and this asymmetric risk appetite profile is both a useful gauge of sentiment and a bullish indicator, according to the SocGen analysts. That said, they acknowledge that it's often not possible to infer whether any option position taken is speculative or hedging related, and of course, for every buyer of an option, there is a seller.

The trigger for Friday's sudden stumble was the nomination of Kevin Warsh for next Fed chair which signalled "lower institutional chaos than feared," the team wrote. That chaos had been a driver of the gold price for several months. Interpretations of the monetary policy that Warsh might pursue also led to a repricing of U.S. dollar and rates, pushing both higher. Suddenly then, SocGen notes, market participants are removing several key risks from their forward price calculations.

Haigh and team explain that the precious metals rally was chiefly propelled by inflows from exchange-traded funds and that influence has been exaggerated of late. Furthermore, data released by the Commodity Futures Trading Commission Friday revealed that net long positioning in gold, at $78 billion just a fortnight ago, was the highest on record.

This crowded positioning, SocGen argues, created forced liquidation as stop-loss limits were breached, margin calls rose and systematic funds (quant funds using algorithms and models to pick trades) reduced risk. The month-end effect, when funds were anxious to protect any gains made in January, also exacerbated the risk-off move.

SocGen remains bullish on gold and view last Friday's correction as healthy.

"We remain bullish on gold as we believe the fundamental rationale for precious upside remains despite one area of uncertainty being removed - namely lower Fed institutional chaos. We always believe a correction can be very healthy," they said.

-Jules Rimmer

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02-03-26 0513ET