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ABCs of ETFs = Fallout #1 - Additional Volatillity

By Jon Nadler       Printer Friendly Version
Jul 25 2008 2:48PM

Good Afternoon,

After a tumultuous week, gold market action was quite lackluster on Friday. Bullion prices were down most of the morning and finally tried to turn slightly higher late in the day, dropping by only $0.20 at last check, to $926.25 spot bid. Most of the activity today was book-squaring related but two sets of better-than-expected economic figures (durable goods and new home sales revisions) kept the dollar close to recent highs (at 72.90 on the index) and gave some indication that if rate hikes were to commence in, say, September the economy might be able to handle them better than previously thought.

Falling oil prices (off nearly $2 at $123.59) were also seen as a hindrance to gold's advance at this late stage of a very trying week. On the flipside of the equation, the doubling of US home foreclosures and continued declines in WaMu shares (despite the firm having access to $50 billion in liquidity and having stated that it does not require outside funding) were somewhat of a drag on the greenback and gave bullion its narrow gains on the day. No matter how we look at it, gold might finish the week with a $30 to $35 loss from last Friday - a move that was unexpected by many. Silver lost 9 cents, at $17.32 while platinum was trying to regain (and succeeding) some of the hefty value losses that brought it to six-month lows this week. The noble metal was up a respectable $50 at $1745 but palladium still lost $4 to $381 per ounce. Automotive news we surveyed indicate a major diesel-oriented push by European automakers for the 09 model year in the US market. If only $5 diesel did not start consumers scratching their heads on where exactly the savings might come from...In any case, platinum liked the trend...

Oil traders remained wary about some of the market's most recent background structural developments in the wake of news such as those reported by the L.A. Times overnight. Surprised? Not us.

"Like we said, nobody is manipulating energy prices ...if you don't count the Dutch: The Commodity Futures Trading Commission on Thursday alleged that Dutch trading firm Optiver Holding manipulated trading in New York futures contracts for oil, gasoline and heating oil in March 2007 -- and turned a profit doing so. The case comes a day after a CFTC task force issued its preliminary report on high oil prices and found no basis for blaming speculators."...and a day after Casey Research economist Terry Coxon characterized oil speculators as "closer to angels and saints than the evil forces they have been made out to be."

The NY Times reports that the: "Optiver scheme, which the defendants referred to in conversations caught on tape as a plan to "bully the market," produced illegal profits of more than $1 million, according to regulators. On at least five occasions, global benchmark prices of those products settled at artificial levels, they said." Angelic behavior, indeed...

The CFTC "complaint charges all Optiver defendants with 19 separate instances of attempted manipulation involving the aforementioned energy futures contracts on 11 days in March 2007. The complaint further alleges that in at least five of those 19 attempts, defendants successfully manipulated certain of these energy futures contracts, causing artificial prices. In three of those instances, defendants forced futures prices lower, and in two instances, defendants forced futures prices higher.

The complaint alleges that defendants profited by approximately $1 million from their manipulative scheme, and that the defendants employed a manipulative scheme commonly known as "banging" or "marking" the close. "Banging the close" refers to the practice of acquiring a substantial position leading up to the closing period, followed by offsetting the position before the end of the close of trading for the purpose of attempting to manipulate prices."

Here is something else that is not surprising, but does give cause for some concern in terms of possible influence in the marketplace. Central bank-sized sales out of what was up until recently seen as the most beneficial and most reliable barometer of gold's glitter: the gold ETF. Mineweb brings us the latest tally:

"The world's largest specialist gold Exchange Traded Fund, SPDR Gold Trust (formerly known as Streettracks Gold Trust and set up by the World Gold Council), has sold over 32 tonnes of gold in two days on July 22nd and 23rd, as investors liquidated holdings as the gold price fell. The total held at the end of July 23rd remained at a massive 673.4 tonnes - still well ahead of the holding at the beginning of the month. The fund previously had had holdings of a little over 705 tonnes.

The sell-off demonstrates that even the big ETFs are suffering declines in their gold holdings in the latest gold sell-off precipitated by the sharp fall in oil prices which again, is in turn as western economies are seen to be continuing in decline and consumption likely to fall in the face of increased oil supplies.

The fall off in oil has helped set a firmer tone for the US dollar, but what should be helping gold here is that the firmer dollar makes the likelihood of US interest rate increases weaker. Indeed it may create scope for further reductions in rates to help try and kick start the economy.

With gold seen as a safety net protecting against rising inflation and economic turmoil it may well be that the declines are short-lived, but with gold seemingly tracking oil minute by minute, and the prospect of further falls in the oil price, the worst may not be over yet for gold investors with further short term falls in prospect."

Gold investors remain on alert for further possible bouts of selling as several technical levels of support were recently taken out and as the commodity complex undergoes what appears to be shaping up as a shift in investment allocation strategies.

Happy Trading. Pleasant weekend.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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