Poor Man's Gold Shows Poor Fundamentals

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The Streettracks Gold ETF is currently trading 12.5% below its record price, seen in mid-March. Commodity ETFs have become a popular investment among investors, by offering a way to avoid risks inherent in listed commodity stocks, such as risks over the performance of management, possible geopolitical dangers, potential natural disasters, and so on.

Earlier this month, the Bank Credit Analyst, in noting the role of futures contracts and related speculative activity in commodity markets, pointed out that since 2001, speculators "have only rarely been net short, even during sharp pullbacks".

A record increase in the net speculative long (bullish) gold bullion futures position on New York City's COMEX coincided with the run in the price of gold, to a record $1,030/oz early last month. On February 22 2008, the net long position in gold bullion futures reached an all-time high of 25.3moz before pulling back; the reversal in gold ETFs has been more delayed. RBC CM analysts anticipate that the high positive correlation between gold bullion and the speculative futures position will continue, and are looking for the long position to decline possibly as low as the 8-10m ounce level, before gold consolidates and makes another run at $1,000/oz in August-September 2008.

So, will the Fed offer one more rate accommodation, or won't it? Many analysts are now convinced that the only remaining excuse to lower rates by the minimum quarter point that is expected is to prevent disappointment in the markets that have become dependent on the cuts. Others feel that the rate cut campaign has already gone overboard and is not the cure for what ails the US at the moment. The jawboning that will come after the meeting will be dissected word for word as that is where most players expect to find the substance of the Fed's stance as we go forward. Nevertheless, here are both sides of the argument as we approach this pivot point in policy. Thereafter, you may roll the dice and wait for them to land:

Jack Crooks, editor of Weiss Researchs latest investment offerings, World Currency Alert and World Currency Options and founder of Black Swan Capital and Ross International Asset Management gives us his take on the two sides of the dollar debate:

"The FOMC is meeting tomorrow. A lively topic of conversation that can be expected from currency traders is the direction of the infamous Fed Funds rate. The obvious question leading up to the interest rate decision: What are the implications of this FOMC meeting on the U.S. dollar? More specifically, has the Fed Funds rate found a bottom, or does the U.S. central bank have more work to do?

Dollar pessimists believe there is still no positive argument in favor of the U.S. economy. The Federal Reserve's dual mandate, maintaining economic growth and price stability, has become quite popular in currency circles. Much of the dollar's demise has been attributed to the Fed's obligation to sustain growth, even when inflation isn't necessarily contained. And keeping the U.S. economy ahead hasn't been an easy task for them. Some of the problems catching up with the economy and infecting the core are:

An unstable manufacturing sector;

Deteriorating business conditions;

Sluggish consumer spending;

Serious slack in the labor market;

And a widespread feeling that money isn't so easy to come by anymore.