Gold's Friday plunge looked, at first glance, like a macro-driven collapse. Spot gold fell more than 12% in a single session, while silver crashed roughly 33%, one of the sharpest precious-metals selloffs in decades. But for ETF investors, the more revealing story wasn't the price drop, it was how gold and silver ETFs behaved when leverage and liquidity simultaneously broke down.
"This looks more like extreme whiplash and margin calls than a fundamental breakdown in demand for gold and silver," said David Miller, CIO at Catalyst Funds and portfolio manager of the Strategy Shares Gold Enhanced Yield ETF (BATS:GOLY). "Volatility doesn't invalidate the long-term bullish thesis on gold as a new primary reserve asset. Gold doesn't move in straight lines historically. Previous corrections like this have historically been entry points rather than exits when monetary and geopolitical uncertainty remain elevated."
ETF Pricing Drifted As Liquidity Vanished
During the crash, the iShares Silver Trust (NYSE:SLV) briefly traded at a premium of roughly 3.3% to the value of its underlying silver, far outside its normal range. Even SPDR Gold Shares (NYSE:GLD), among the most liquid ETFs globally, saw bid-ask spreads widen as market makers stepped back.
These distortions reflected stress in the ETF arbitrage mechanism. When volatility increases and balance sheets face squeeze, authorized participants can pause share creation and redemption, leaving ETFs to trade on available liquidity rather than net asset value.
Miller noted that silver's move was especially extreme because of its dual role. "Silver is behaving like an asset would in the midst of a parabolic move, not a safe haven," he said, pointing to its exposure to industrial demand and growth expectations. "With one foot in industrial demand for EVs, silver tends to sell off harder when growth expectations wobble or liquidity goes away. That is exactly what we're seeing.."
Margin Hikes Turned Selling Into A Cascade
The pressure intensified after CME Group raised margin requirements on gold and silver futures, forcing traders to post more collateral or liquidate positions. That liquidation flowed directly into futures markets that anchor ETF pricing, worsening dislocations in ETF spreads and execution.
"Traders surprised by last week's volatility weren't paying attention to positioning," said Mark Malek, CIO at Siebert Financial. "Crowded trades don't need bad news to unwind–only a lack of new buyers." Malek described gold's recent rally as both macro-driven and narrative-fueled, warning that parabolic price action "embeds significant risk by definition."
Long-Term Gold Exposure Didn't Break
Despite the turmoil, institutional conviction remains intact. JPMorgan reiterated a bullish outlook for gold, projecting prices could reach $6,300 per ounce and citing sustained central bank demand as countries diversify reserves away from the dollar. Funds like the abrdn Physical Precious Metals Basket Shares ETF (NYSE:GLTR) remain up about 7% year-to-date.
For ETF investors, Jan 31 was a liquidity and leverage event, not a collapse in gold's long-term case. As Malek put it, "This isn't the start or the end of gold's story—it's the dangerous middle."
Image: Shutterstock
