A new BIS analysis reveals how retail trader euphoria, amplified by leveraged ETFs, triggered a devastating spiral in precious metals markets
When gold and silver prices plunged off a cliff in late January 2026, the market’s first instinct was to search for the usual suspects: Was the Federal Reserve turning hawkish again? Was the dollar staging a comeback? Had some giant institution dumped its holdings?
The answer, according to a freshly released report from the Bank for International Settlements (BIS), points in a far more unexpected direction.
Let’s rewind to that dramatic moment.
In late January 2026, precious metals markets experienced what can only be described as a “nuclear winter.” Silver prices collapsed roughly 30% in a single day — this after having already doubled over the course of 2025 and surged more than 50% in the first few weeks of 2026 alone. Gold followed a similar if less extreme trajectory, posting its own dramatic declines.
Conventional explanations quickly emerged: shifting expectations for the US dollar, changing views on monetary policy. But Egemen Eren, Ingomar Krohn and Karamfil Todorov of the BIS’s Monetary and Economic Department uncovered an awkward fact after digging into the data — these traditional narratives didn’t align with broader fundamental changes.
If the fundamentals hadn’t shifted, what had?
The three BIS analysts began their detective work by examining fund flow data. Their first discovery was surprising. “The main source of inflows came not from institutional investors in suits and ties, but from retail traders,” they found.
The data showed that throughout the run-up to the crash, institutional investors either maintained stable positions or quietly reduced their exposure. The real buying pressure came from the army of retail investors flooding into precious metals through exchange-traded funds (ETFs).
Futures positioning data confirmed this judgment. In the lead-up to the correction, “non-reportables” — positions too small to require separate reporting, typically representing retail traders — had built up substantial long leveraged positions in silver futures. While “managed money” (including commodity trading advisers and institutional investors) was also long, the scale and proportion told a completely different story.
The culprit wasn’t institutional — at least not in the traditional sense.
If retail traders were the perpetrators, what was their weapon of choice?
The answer lies in leveraged ETFs.
Unlike ordinary ETFs, leveraged products come with a fatal “autopilot” mechanism: to maintain a fixed daily leverage ratio, they must rebalance every single day. When prices rise, they buy more of the underlying asset to maintain their leverage target; when prices fall, they are forced to sell.
In normal markets, this merely amplifies volatility. But when driven by extreme sentiment, it becomes a self-fulfilling prophecy.
The BIS report describes a chilling cascade:
First, retail euphoria pushed gold and silver prices higher, forcing leveraged ETFs to chase the rally by buying more → prices rose further, attracting even more retail investors through ETF channels → ETFs began trading at premiums to their net asset value, signaling “one-sided buying pressure that outpaced primary market arbitrage capacity.”
Then came the turning point.
For reasons that remain unclear (perhaps natural profit-taking after such an explosive rally), prices began to soften. The leveraged ETF rebalancing mechanism immediately kicked in — this time in reverse. As prices fell, they were forced to sell.
What proved truly fatal was the death spiral combining “leverage rebalancing” with “margin calls.” As prices tumbled, variation margins on futures positions skyrocketed. Several exchanges “coincidentally” raised initial margin requirements at precisely this moment. This meant every leveraged investor faced the same dilemma: put up more capital, or liquidate positions.
Retail traders who had maxed out their leverage clearly didn’t have unlimited ammunition. The forced liquidations began. The BIS report describes it starkly: “The liquidations of investors’ positions, alongside systematic selling from leveraged ETF rebalancing into the decline, probably added to downward pressure, creating a self-reinforcing loop of lower prices and further margin calls.”
Notably, in the midst of this retail exodus, the real liquidity providers turned out to be the very dealers who had been holding short positions — they stepped in by covering those shorts, catching some of the falling knives.
The BIS analysts also identified a troubling trend: the “destabilizing trading footprint” of leveraged ETFs had expanded significantly over the previous year.
They constructed a metric called the “leverage rebalancing multiplier” to measure these funds’ daily impact on markets. This multiplier doubled over the course of 2025. Meanwhile, the ETF share of overall market activity rose in parallel.
In other words, leveraged ETFs were transforming from marginal players into core market participants — and their automated trading algorithms were busy amplifying retail sentiment into full-blown market earthquakes.
The story’s ending carries a certain irony.
On the eve of the crash, retail traders piled in through premium-priced ETFs, enjoying paper fortunes. On the day of the crash, leveraged ETFs’ automatic selling mechanisms and margin calls conspired to march these same traders to the gallows of forced liquidation. And those once-premium ETFs? In the silver market, they rapidly flipped from premium to deep discount — one-sided buying had become one-sided selling, too fast for arbitrageurs to react.
The BIS report concludes: “The liquidations of investors’ positions, alongside systematic selling from leveraged ETF rebalancing into the decline, probably added to downward pressure, creating a self-reinforcing loop.”
So when we ask who caused the gold price flash crash, the answer becomes complicated: it was the euphoric retail traders, it was the ingeniously designed leveraged ETFs, it was the exchanges raising margin requirements at the worst possible moment, and it was the downward spiral that, once started, couldn’t stop itself.
Perhaps the real culprit is the timeless combination of human nature and leverage.
