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Giant Footprints
By Jon Nadler
01/17/08

After an period of early indecision and another dip to the $877 area, gold prices aimed for higher ground overnight and early on Thursday, amid a fresh slip in the US dollar and a mild gain in crude oil values. The possibility of a stimulus-oriented pre-emptive ECB rate cut emerged yesterday as apprehensions about a slowdown and low levels of business confidence gave rise to speculation that the heretofore staunch anti-inflation stance may be on the wane.

Although the trade lifted the dollar on such expectations, the gains have now given way to more of what we have witnessed previously; a parade of bad news from financial firms, followed by expectations of heftier and heftier rate cuts two weeks from now, and a skidding greenback. Until the extent of the credit maelstrom is fully quantified, markets will continue to be buffeted by uncertainty and bouts of flight to quality. The latest piece of news tells of US housing starts for December being at a 16 year low and the 2007 homebuilding decline being the worst in 30 years. Not exactly dollar-supportive news.

New York spot gold prices spent most of the day on a firmer footing, eventually rising to near $891.00 per ounce as the dollar was poised to retest the 76 mark (or lower) on the index amid news that Merrill Lynch has taken a more than $14 billion charge on subprime trash, swinging the firm to its largest ever loss. At the end of the day, however, selling pressure re-emerged kept gold suppressed (hmmm...maybe a bad choice of words) and the market closed down $1 at $879.90. The correction -whatever its eventual magnitude - appears to remain in 'unfolding' mode. Credit crisis jitters reignited as firm after firm goes through the pain of write-offs and shrinking profits. Bank of NY Mellon reported a 68% decline in profits. These headlines, on a day when the Fed chief is supposed to appear before Congress and try to keep its members from breaking out in a cold sweat when they hear the news he has for them. Silver added 12 cents to finish at $15.90 per ounce while platinum lost $1 to $1558.00 per ounce.

And now, for something...completely different. The latest from TheStreet.com where interpid reporter Simon Constable analyzed the latest developments on the gold ETF front. Warning: This writer was also asked a question, and thus gave an opinion (and owns none of the ETFs mentioned).

" The big plunge in gold prices Wednesday was likely amplified by investors dumping holdings of the largest bullion exchange-traded fund.

StreetTracks Gold Shares (GLD) saw redemptions of 21.51 tons of gold, worth more than $600 million, marking the biggest ever one-day decline in metal holdings for the fund, data from the firm showed.

Gold futures dropped over 3% at one point and reportedly caused order imbalances on the electronic exchanges, some traders say.

"How could it not impact on the downside?" asks Jon Nadler, a precious metals analyst at Montreal-based bullion dealer Kitco.

Current holdings of streetTracks Gold Shares total about 631 tons, or around twice the level held by Britain's Bank of England, and some observers say that the holding represents something of an overhang on the market.

"We have to think about the equivalent of a new central bank having been born and one which has no scruples about monetizing its gold," adds Nadler. "Institutional holders are only too happy to sell to lock in profits."

The selling came after gold ventured above $900 for the first time in New York. Benchmark futures contracts for bullion were recently tacking on $4.30 at $886.30 an ounce. The price of the metal has run up from around $840 at the beginning of the year.

In 2004, the World Gold Council developed the first bullion exchange-traded fund in conjunction with StateStreet, and it was quickly followed by a similar product from Barclays, the iShares Comex Gold Trust (IAU) in January 2005. The latter product, however, has never been as popular and to date has only amassed holdings of 58 tons of gold bars. The development of the ETFs opened the bullion market to both institutional and retail investors in a way never possible previously by eliminating burdensome administrative costs usually associated with holding gold. But the popularity of the funds in terms of capital deployed is dominated by institutional holders.

As such, the holdings of the fund can be expected to gyrate up and down according to sentiment on Wall Street."

Remain highly attentive to news flows and to English interpretations of what may be said by the Fed chief later today as fourth-quarter results keep coming and investors continue to remain jittery. The cross-currents have barely begun to be felt after what will have been another week of historic significance for gold.



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