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Down or Up or Both? - Take Your Pick
By Jon Nadler

After having tested both ends of the support/resistance channel for the day (from $800 to $820) gold prices retreated to the middle of the range at $810 and had a rather lackluster afternoon session. The euro skidded towards its lowest value against the dollar in nearly half a year as apprehensions about the state of the economy in the EU rose yet another notch. The common currency fell against a dozen actively traded currencies and showed that this is not simply a dollar-euro cross story of late.

Crude oil remained near $115.50 while the greenback tried to recapture the 77 level on the index and was last seen at $1.474 against the euro. Geopolitics remained somewhat of a concern as Russia did not appear to honor a cease-fire with Georgia (let alone withdrawing from the region) and as fears of a power vacuum in Pakistan became visible in neighboring India. Finally the BoE was in full hand-wringing mode as it pondered what to do about interest rates amid a rash carbon-copy economic syndromes that appear to have been imported from across the Pond (housing slump, slowing economy, rising inflation).

The mid-week session in NY was unremarkable with the exception of the attempt to pierce $800 earlier in the day, and spot gold was last seen dropping $2.10 per ounce at $811.60 as players watched the dollar eased back to one tick under 77 in late dealings, but had little else to look for, at least on the economic calendar. US mortgage applications fell to their lowest level in eight years as refi mania has obviously become a thing of the past. Now where will the money come from for that shiny convertible? The piggybanks remain empty.

Silver gained 1 cent to $13.25 and platinum rose $12 to $1357 while palladium lost $3 at $282 per ounce. Focus remains on trying to rebuild some of the recently opened gaping holes in gold's armor but worries persist about some of the background structural developments in the market. Reuters reports that: " SPDR Gold Trust, the world's largest bullion-backed exchange-traded fund, said on Wednesday its gold holdings dipped just over 1 percent on Aug. 19, its first outflow in more than two weeks. The trust GLD now has 651.37 tonnes of gold, its lowest holding in seven weeks, it said. ETF buying has represented a major source of demand for gold in recent years, but investors fear a sell-off of their gold holdings could have a significant impact on the price of spot gold."

In addition, a factor that our good friend George Gero over at RBC Wealth Management in NY has been warning us about quite frequently in his daily missives, has now made it onto the media's radar and - according to Bloomberg's Millie Munshi - goes something like this:

"Gold, down 21 percent from a record $1,033.90 an ounce in March, may be headed down after open interest in New York futures contracts for the precious metal plunged to the lowest level in 11 months. The CHART OF THE DAY shows open interest, or the total number of contracts yet to be closed, liquidated or delivered. This reached 365,611 on Aug. 12, down 26 percent from a four- month high on July 18 and the lowest since Sept. 10. Open interest on the Comex division of the New York Mercantile Exchange reached 593,953 on Jan. 15 -- the highest since at least 1994 -- before gold rallied another 15 percent to a record on March 17.

"Open interest in gold is down sharply and it just shows you people are running for cover from this market right now," said Ron Goodis, the futures-trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "No one wants to get into gold now."

Gold plunged 8.4 percent last week, the biggest drop in 25 years. Gold for December closed yesterday at $816.80 an ounce. Commercial users of the metal, including investors or mining companies, also have reduced their bets on price gains to the lowest since September. Net-long positions fell by 20 percent from a week earlier to 130,660 contracts on Aug. 15, the biggest drop and the lowest level since September.

"An outflow of passive and active investment money" means "it is hard to be positive about the out for precious metals over the next month or so," John Reade, the head of UB AG metals strategy in London, said in a report on Aug. 18. "

UBS is actually quoted once again today, this time in a different snap survey conducted by Bloomberg. A number of analysts were polled on their near and medium term outlook for metals and here is what they had to say:

"Given the way the currencies are moving, there's probably more downside to gold," said Tom Hartmann, a commodity analyst at Altavista Worldwide Trading Inc. in Mission Viejo, California. "Any type of gold strength is going to be sold. Do you want to step in front of a dollar rally?"

Gold futures for December delivery fell 50 cents, or 0.1 percent, to $816.30 an ounce on the Comex division of the New York Mercantile Exchange. Most-active futures slipped 1.8 percent in the past five sessions as the dollar gained 1.3 percent against the euro.

"If -- and only if -- gold closes above $860 an ounce are the bulls able to wrestle control back from the bears," said Ralph Preston, an analyst at HeritageWestFutures.com in San Diego. "Gold needs to push above $900 an ounce in the coming weeks or prices are going to begin to congest and create a bear flag setting the market up for another leg down, targeting $750 an ounce."

Gold last traded below $750 an ounce on Oct. 22. Most- active futures reached a record $1,033.90 an ounce on March 17 as crude oil climbed and the dollar weakened.


Silver futures for December delivery fell 6.7 cents, or 0.5 percent, to $13.153 an ounce on the Comex. Silver has dropped 12 percent this year while gold has slipped 2.6 percent. Silver will trade at $14.70 an ounce in a month and $16.40 in three months, UBS AG said today in a note.

The Swiss bank said it holds its one- and three-month forecasts for gold prices at $850 an ounce and $900 an ounce, respectively.

"All that stands in the way of an impressive tactical gold rally is a correction in the dollar," John Reade, UBS's head of metals strategy in London, said today in a note to clients. "If you are confident that the euro has seen its low against the dollar for the near term, buy gold now."

The gold market "will begin to shift on fundamentals, which lend much support to higher prices from here, such as the deteriorating situation in the credit markets and geopolitical tensions," HeritageWest's Preston said. "That should put a floor on any further price declines under $750."

OK, just as long as we note that $750 is still some $60 away from current levels. As is the near-term target for the upside. Looks like a balanced act.

More significant econ data is in the pipeline for tomorrow, as is Mr. Bernanke's set of remarks on Friday about financial stability. Of late, that has been quite the oxymoron. Linguists have already bestowed the honor of word of the year to 'subprime.'

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