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The precious metal's stunning reversal Thursday morning came after the release of a key gauge of manufacturing activity from the Philadelphia Federal Reserve , showing a surprise contraction in the Mid-Atlantic region.
Adding to gold's "safe-haven" trade, traders say, are real signs of the contagion effect of European sovereign debt risk, as evidenced by the spread between Spanish and German bond yields trading at all-time highs.
This 24-hour shift in traders' perception of gold has been swift but not unexpected, says trader John Netto, founder of M3 Capital. "The decoupling we've seen today between gold and risk assets (including the S&P, oil and copper) is congruent with the price action that we've seen in past periods of sharp declines."
"Gold often trades with a strong correlation to risk assets during initial stages of a bear market," Netto says. "However, most gold traders also understand — as evidenced in the bear market in 2008 and a sharp pullback in equities in 2010 — that gold on a relative basis continues to greatly outperform other assets."
"The action in gold today shows the market is beginning to price in a more accommodative policy from the Federal Reserve and central bank community," Netto says. "That is why gold is rallying not only in dollars, but in British pounds and Euros as well."
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