Gold Traders Whipsawed


"A rising [GLD/GDX] ratio indicates increasing strength of bullion over mining stocks."

COMEX traders got a good lesson yesterday as gold prices tumbled below $900 an ounce in the day session amid continuing speculation of brightening economic prospects. By the time floor trading closed, the active April contract lost nearly $28 to settle at $889.10.

Better-than-expected U.S. economic data and seller exhaustion in the equity markets fostered some optimism for financial issues over the past few sessions, taking the safe-haven luster off gold. Yesterday's price break, in fact, appeared as a breakthrough move out of the head-and-shoulders top formed over the past couple of months.

When the report of the Federal Open Market Committee's intention to buy a boatload of long bonds was digested in the overnight market, gold prices reversed. The move, expected to lower interest rates on mortgages and other consumer debt was unusual, to say the least. When the Fed engages in open market operations, it typically plays in the short end of the yield curve, so this intervention really got noticed, not just for its size but also for its long-term balance sheet implications.

Gold's initial sell-off sent the GLD/GDX ratio back down to retest its 200-day moving average. Fast and hard. The subsequent bounce in prices, if it holds, will mark a second successful defense in a month. A rising ratio indicates increasing strength of bullion over mining stocks.

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