Gold Investor's Weekly Update: May 24, 2025
The risk is high for a gold market attack next week due to the coming options expiration on Tuesday and the fact that the contract is extremely out-of-equilibrium.
We make the case why a breakout from the bull-flag pattern and to new all-time-highs is a LESS LIKELY scenario at this time.
In the scenario that gold does retrace lower towards the bottom rail of its bull-flag pattern, our price target range would be $3,080 to $3,120.
Since last week’s report, the gold price staged a strong rally and instead of being pressured lower by the coming options expiration as we were expecting, it ran up to the top of an apparent bull-flag pattern where it closed the week.
This leaves the gold price with two choices: either i) it remains within the bull-flag pattern which likely implies a decline back towards the lower end of the pattern or ii) it breaks out and begins rallying to new all-time-highs in the coming weeks.
Before diving-in to contemplate each scenario, we need to bring ourselves up to date on the main near-term constraint facing the gold price which is the soon to expire Jun’25 gold options and its expiration on Tuesday, May 27th. After this week’s advance, the contract has again been pushed even further out of equilibrium. Although its max-pain price is now up to $3,095, this shift in the curve was not sufficient to offset the gain in the underlying gold price.
As a result, the contract’s delta-intrinsic value (IV) increased to $2.2 billion based on Friday’s closing price of $3,358 (GC future). To put this number in perspective, if the contract were to reach expiration at such a level, it would be 3x larger than the next runner-up amongst the large open-interest, Jun or Dec contracts when viewed over the past five years. In other words, it would be an extreme outlier if it were to occur.
The alternative is price begins declining and works-off some of this large divergence in the limited time remaining until its Tuesday, option expiration. Is there a historical precedent for something like this to occur? Yes and here are some recent examples.
Example #1: Dec’24 Gold Options Expiration Smack-Down
In the five trading days leading up to the Dec’24 gold options expiration, the gold price staged a strong rally and closed the week at the high. Then on the following Monday’s option expiration (Nov 25th), the gold price was slammed down by 2.2% as shown in Figure 4.
Options sellers had apparently waited until the last minute to push the contract back into equilibrium. Their one day hit on price was able to drop the contract’s delta-IV by 80% and down to $134 million as shown in Figure 5.
This historical instance is particularly noteworthy because it too was a large open-interest contract like that of the current Jun’25 contract, and thus a substantial amount of professional money was on-the-line.
Example #2: Mar’25 Gold Options Expiration Smack-Down
The other recent historical instance involved the Mar’25 gold options contact. Although not as large in terms of its open-interest, it too was being pushed further out-of-equilibrium in the days leading up to its options expiration. Then, at the last minute on option expiration day, the gold price was knocked down which catalyzed a decline that continued until First Notice day on Feb 28th.
In this instance, that one-day price-hit on options expiration was sufficient to cut the contract’s delta-intrinsic value in half and thus bring back towards equilibrium as shown in Figure 7.
As we have seen with these two examples, clearly there is a precedent for the gold price to be vulnerable to attack even up to the last minute on options expiration day. We also see that the downward momentum catalyzed by an options expiration day hit on price can carry forward into the subsequent few days as well. In the current case of the Jun’25 gold contract, it will be exposed to both reduced holiday level trading on Monday (Memorial Day in the United States) as well as the Tuesday option expiration day itself. In other words, it is potentially susceptible to a two-day attack. On top of that, the gold price will be going into this vulnerable period perched at the very top of a known resistance level which is the top-rail of its bull-flag pattern shown in Figure 1. Are professional traders more likely to bet on gold breaking-out of the bull-flag pattern and shooting off to new all-time-highs or will they see the ‘writing-on-the-wall’ and figure that the odds favor a retrace lower?