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August 24, 2009

London Gold Market Report
by Adrian Ash

Gold Still "Range Bound" But Investors "Hedging Their Bets" on Dollar & Stocks

THE PRICE OF GOLD briefly added to last week's gains early in London on Monday, rising to $957 an ounce before slipping back as Asian equities jumped and European shares hit fresh 10-month highs.

Crude oil dipped below $74 a barrel, but government bond prices were little changed as the US Dollar ticked higher on the forex market.

Gold hit a one-month against the British Pound, up at £580 a ounce, while Eurozone investors now looking to Buy Gold saw the price unwind the final few cents of last week's 1.5% drop at €668.

Tocom Gold Futures traded in Tokyo added 2.7% to close at a 7-session high of ¥2,919 per gram.

"We do not expect gold to break out on either side of the range defined by the charts, trading between $930 and $968 an ounce," says Wolfgang Wrzesniok-Rossbach at Heraeus, the German refining group.

"Longer term, the changes will continue to depend particularly on the US Dollar."

Friday's spike in Gold Prices forced a sharp drop in Indian jewelry re-stocking, traders told the Reuters newswire in Mumbai this morning, and "Activity in the physical market has slowed," agrees Standard Bank's Walter de Wet this morning, "as the possibility of a technical break-out above $960 looms.

"This [also] seems to be discouraging the market from taking any large short positions."

Data released late Friday showed that commercial traders investing for miners, refineries and wholesalers in the US Gold Futures and options market cut their negative bets on the Gold Price for the second time running in the week to last Tuesday.

US regulator the Commodity & Futures Trading Commission (CFTC) also said hedge funds and other speculative traders trimmed their bets, cutting their "net long" position of bullish contracts over bearish bets by some 9% to a one-month low equal to 564 tonnes.

Commenting on the regulator's plans for curbing speculation in commodity derivatives, "Obviously, the CFTC is particularly focused on futures and not on physical assets," says Hector McNeil, global head of sales and marketing at ETF Securities, which launched exchange-traded, securitized trust funds in gold, silver, platinum and palladium onto the Japanese stock market today.

"In fact, we have several products in the US currently and we've been given no indication that they will be affected."

However, exchange-traded funds "are a top target in the Commodity Futures Trading Commission's drive to rein in speculation in oil markets," reported the Wall Street Journal on Saturday.

"I don't want to limit liquidity," said Bart Chilton, a CFTC commissioner, to the WSJ in an email. "But above all else, I want to ensure that prices for consumers are fair and that there is no manipulation - intentional or otherwise."

Last week the CFTC's fellow regulators - the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FIRA) - issued an "investor alert" warning of high risks in certain ETF products. So-called "leverage" and "inverses" products use derivatives to double or reverse the price moves of a particular commodity, such as gold. But rolling fees, plus the fact that these strategies are applied on a daily basis, mean longer term performance may differ wildly from what investors expect.

"The ETF holding has remained remarkably strong overall," notes Lawrence Williams at MineWeb, "suggesting that there is still considerable unease out there on the strength of the economy."

So far this year, nearly half the $22.1 billion flowing to ETFs have gone to the SPDR Gold Trust listed in New York. But last Friday saw it increase the Gold Bullion used to "back" its shares for the first time since late May.

Total holdings at the five ETFs sponsored and launched by the mining-backed World Gold Council marketing group now stand 5% below their all-time peak of mid-June.

"Many big investors are still hedging their bets and maintaining gold as a significant part of their investment portfolios despite the recent big rises in the Dow and the FTSE," reckons Williams. "Many will also be hanging on to [gold] as a dollar hedge."

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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