After soaring to $4,700, will the trend reverse? Massive short positions appear in the options market—what's next for gold?

After surging over 1% on Monday, spot gold briefly soared to near $4,700 on Tuesday, but soon gave up all intraday gains.

According to UOB, gold, which has already surged nearly 15% this month, is heading toward “the strongest single-month gain since September 1999.” The direct trigger for this rally is the U.S. Treasury Secretary Yellen’s announcement last week of a Treasury buyback plan.

The Treasury announced a significant increase in the maximum size of buyback operations from $2 billion to at least $4 billion. Yellen stated that she has a “large policy toolbox,” which the market interpreted as a signal of more direct interventions to come.

According to CNBC, citing two senior officials, Yellen may use the Treasury’s nearly $1 trillion general account to fund this plan. This move effectively suppressed the surging U.S. Treasury yields seen in August, which have dropped a cumulative 3 basis points this month.

Deutsche Bank analyst Michael Hsueh noted in a Monday report to clients that the Treasury’s announcement could push gold prices above its targeted $4,800 level. This target implies a further upside of nearly 3% from last Friday’s close.

Hsueh emphasized: “We view the Treasury’s policy shift as a clear signal supporting a constructive outlook for gold.”

Bridgewater Associates founder Ray Dalio also suggested last Friday that investors overweight gold, with allocations of 10% to 15% of their portfolio, to hedge against potential debt crises triggered by rising government borrowing.

Options Market Sees $100 Million Bearish Bet

However, just as market sentiment was extremely bullish, a massive transaction occurred in the options market on Monday that ran counter to the prevailing bullish consensus.

Just 20 minutes after Monday’s open, one trader sold nearly 116,000 SPDR Gold Shares ETF call options expiring on September 18 with a strike price of $420, earning $202 million in option premiums from selling these in-the-money calls.

Subsequently, the trader spent $144 million to buy the same number of call options with the same expiration date but a $430 strike price, ultimately netting $58 million in option premium income from this operation.

Although selling call spreads is typically seen as a neutral strategy, this trader chose to sell in-the-money calls, pushing the breakeven point at expiry up to $425. Given that GLD is currently trading at $427, this essentially amounts to a bet that gold will experience a modest pullback in the next four weeks.

Nigam Arora, founder of The Arora Report, commented: “The probability of a short-term pullback in gold is very high.” He revealed that while momentum funds remain extremely bullish, smart money has turned negative, with GLD seeing a net outflow of about $60 million on Monday.

In contrast, retail and overall market bullish sentiment remains exuberant. ThinkOrSwim data shows that traders bought over 37,000 GLD call options on Monday, compared with fewer than 20,000 put options.

SpotGamma data further confirms that 13 of the 15 most actively traded contracts on Monday were call options. According to data from CBOE’s LiveVol, driven by this massive call spread transaction, GLD’s single-day trading volume approached five times its 30-day average.

Jackson Hole Annual Meeting Faces Multiple Macro Challenges

The huge bearish trade happened during a week filled with macro uncertainty. Markets are eagerly awaiting Wednesday’s U.S. Personal Consumption Expenditures (PCE) inflation data and Thursday’s opening of the Jackson Hole Economic Symposium in Wyoming—a key window for Federal Reserve policy signals.

Notably, the yield on the 10-year Treasury is testing multi-year highs, and real rates are also rising. In traditional finance logic, rising real rates should be a clear negative for non-yielding assets like gold, but gold prices have recently defied this rule and climbed higher.

Fed Chair Powell is set to speak at Jackson Hole, and the markets are anxiously seeking fresh clues on the rate outlook. In its latest report, Citigroup warned that if Powell delivers a hawkish message, it’s very likely to abruptly halt gold’s current runaway rally.

Citigroup also pointed out that if the Jackson Hole meeting releases an unexpectedly dovish signal, gold would benefit tremendously. “Because the market will not only continue to price in lower Fed rate hike expectations, but will also refocus on currency depreciation trades in light of renewed concerns over Fed independence and U.S. debt sustainability.”