Good Morning,

The seemingly unstoppable haemorrhage of losses in the banking sector was back on the front pages of most papers and financial websites overnight. Bank of America lost $1.8 billion due to a $15.3 bleed at its newly-acquired Merrill unit, Citi managed a fifth straight quarterly report full of red ink - to the tune of $8.3 billion. Following that, the bank announced cell division was underway and that it would split into 'core' and 'non-core' entities. BofA menawhile, got $20 billion from Uncle S. and toxic asset guarantees of another $118 billion. Now, its loan officers can put stamps of approval on any request they might have doubts about, as the deal cannot go sour. Ever. Okay, so much for today's nationalization news, one day after the FDIC's head saw no possibility of such a process ever taking place.

Elsewhere, Intel's profits fell by 90%, Hitachi was to report a $1 billion or larger loss, Toyota, Honda and Mitsubushi are cutting more staff and car production, Sony Ericsson swung to a loss, a second round of UK bailout talks began, and Anglo Irish Bank was...nationalized. The trend towards government ownership of domestic financial institutions appears to be taking hold. A double-edged sword, this. The process could restore confidence and unfreeze the lending glacier, or it could undermine faith in banks and end up swelling mattresses around the world in a significant way.

The price dip to the $800 level stimulated a modicum of demand in the all-important Indian market, and proved once again that the price-conscious Indian buyers are gifted with market savvy. More of the same was also seen in the professional pits, where some buyers emerged ahead of the long weekend in the US market. News that South African production fell was largely offset by increases in Russian output and a significant drop in the gold market's vital demand component; jewellery fabrication.

Increasingly, the 2009 question shapes up as one that asks whether investment demand can offset slumping core demand and carry the day for gold prices going forward. For quick reference, please note that in 2007, some 2800 tonnes of bullion were absorbed by jewellery fabrication and industrial offtake. Investment demand -good as it was- took 933 tonnes from the market. No need to dwell on ratios, but it is clear that investment demand has some way to go before it becomes the dominant force in this little market.

New York spot dealings opened with a 1.5% gain this morning, as participants aimed to square books and prepare for the long weekend. Bullion edged closer to $830 and was ahead by $12 an ounce (at $829.00 bid) at the opening bell. Advancing global stocks offered some relief to gold buyers and the government guarantees on toxic bank assets gave further room to maneuver in riskier assets to speculators. The IEA forecast a two-year slump in oil demand, while pundits forecast a Dow at 6K if the lows of 2008 are taken out. Interestingly, yesterday was the day when we saw an 8K Dow and $800 gold. At this rate, the old Russell theorem of a crossing in the Dow and gold might yet be plausible.

Silver gained 24 cents to open at $10.82 per ounce. Platinum and palladium rose as well, the former adding $20 to $939 per ounce, while the latter climbed $5 to $183 per troy uunce. Chrysler is said to be seeking TARP money...

The US dollar fell 0.68 to 83.78 on the index. But, hey, the Russian ruble enjoyed a devaluation practically every day of the last week. Nice going, comrade. Meanwhile, crude oil meandered around $35 per barrel, off by 36 cents and was held back by the aforementioned IEA report.

And now, for your edification, the complete highlights of the GFMS Update on gold, released on the 15th:

GFMS released Gold Survey 2008 - Update 2 today, their latest report on the gold market. A summary of the findings of the report as given by Philip Klapwijk, GFMS’ executive chairman, at a presentation in Toronto organised by the precious metals consultancy.

A key feature of the report is GFMS’ forecast that gold prices could achieve a fresh all time high in the first half of 2009 as net investment surges. The consultancy noted that there has already been several months of rocketing demand, chiefly in Europe and

North America, from certain investors, primarily high net worth and retail, but this has been masked by heavy fund redemptions as cash has been sought to cover losses elsewhere, meet margin calls and so forth. Klapwijk added, if it hadn’t been for this fund selling, we’d be easily back over $1,000 by now and, as soon as it quietens down, I’m sure a strong rally is going to emerge.

GFMS believe that the main motivation behind this expected surge in investment is risk aversion and a desire to preserve wealth, as illustrated in its focus being physical bullion, often delivered, or allocated metal accounts. Gold was also seen as benefiting from concerns over the solidity of other assets, be that cash at a time of bank failures, equities as we head into a possibly deep recession or bonds as the threat of inflation looms. The latter was seen as particularly important, with Klapwijk commenting we’ve seen some pretty extraordinary monetary and fiscal policies getting proposed by the US and other governments and this all has the potential in time to spark some serious, and maybe, sustained inflation. And nor can we ignore the likelihood of dollar weakness, perhaps even a dollar bust, as US creditworthiness gets called into question.

The consultancy sees gold’s fundamentals as relatively neutral in the near term, with the damage from weak demand being largely neutralised by restrained supply. Scrap in the first half of this year, for example, is only forecast as broadly flat year-on-year and official sector disposals are expected to continue falling. The report still envisages that selling will be dominated by the signatories to the Central Bank Gold Agreement (CBGA) and that buying by banks outside this group will remain limited, with no hint made of any purchases by the big dollar holders in East Asia. On the demand side, high and volatile prices plus the slowdown in world GDP growth were forecast to cut jewellery demand by 11%. Klapwijk added, An 11% drop may sound restrained to some but demand in the first half of last year was fairly feeble and the actual tonnage we’re proposing for this year could easily be a 20-year low.

Jewellery offtake was also estimated to have declined by 11% in 2008, chiefly due to the damage from high and volatile prices, especially in the developing world, and the slide into recession in many countries, in particular the United States. GFMS also sees price expectations as important, with Klapwijk commenting, in the third quarter last year, we saw a major bounce back in Indian offtake, even though the rupee price was little changed on earlier in the year, - but people thought some decent price gains were in the offing. And without that India-centred rebound, we could easily have seen dollar gold properly breaching the $700 barrier.Update 2 also sets out the often overlooked contribution to demand in the first half of last year from producer de-hedging at an unexpectedly large volume of over 250 tonnes. There was also an unanticipated fall in mine output in the first half. Supply in total was in fact relatively restrained as central bank selling for the full year fell by a hefty 40% or so, while scrap rose by ‘only’ 13%, despite the price hike of 25%, reflecting earlier releases of near market supplies.

Despite the contribution from restrained supply and pockets of demand strength, GFMS still see investment as the chief driver of price action last year. The rally to an all time high over $1,000 in March, for example, was ascribed to a ‘perfect storm’ of such factors as dollar weakness, oil price gains and financial instability, both actual and feared following the collapse of Bear Stearns. The slump in prices, particularly after the July price spike, to around $700 by the fourth quarter was also attributed mainly to investors.

This was initially said to be largely the product of selling inspired by dollar gains and a general exodus from commodities as world GDP growth estimates were cut. However, it was the later forced selling, noted above, by the funds that proved particularly undermining. The final ‘chapter’ in the price story was the emergence of heavy physical buying towards year end, the scale of which was said to have been sufficient to have swung implied investment activity from net selling in the third quarter to net inflows in the fourth and to have laid the bedrock for future price gains.

Supply Highlights

Mine production in 2008 fell by a provisional 88 tonnes, its third consecutive year of decline. Losses were recorded in a wide range of countries but much was attributable to Indonesia, South Africa and Australia. In contrast, gains were recorded for China and Russia. Output in the first half of 2009 is forecast to grow slightly, although that is in comparison to a weak first half in 2008.

Producers’ total cash costs rose by 22% year-on-year to an average over $470/oz for the nine months to end-September. Net official sector sales fell by over 40% to just under 280 tonnes in 2008. This was mainly due to lower sales by CBGA signatories, a change in turn largely driven by the disappearance of Spain as a seller, while central banks outside this group continued as small scale net purchasers. In the first half of 2009, total net sales are forecast to fall yet further year-on-year. Higher gold prices and more distress selling helped lift scrap supply by around 13% in 2008, although the total remained below the 2006 record, reflecting how much near-market supplies had emerged then. Much of 2008’s rise was due to the Middle East, with increases in the other major regions a more modest 6-10%. First half 2009 volumes are forecast as roughly flat year-on-year.

Demand Highlights

Jewellery demand fell by 11% in 2008 to its lowest level since 1989. The bulk of losses were in the first half, while third quarter demand even rose slightly. Much of the overall drop was due to high and volatile prices, although price expectations were also important, being largely responsible for a robust third quarter in India and thus in the global total. The slowdown in world GDP growth was also significant, explaining much of the slump of around a third in US jewellery consumption and double-digit losses in many EU countries. China, however, still managed growth, if much slower. Other fabrication rose by 2%, entirely as a result of a rise of over 40% for official coins as all the remaining areas saw losses, chiefly through economic malaise and high gold prices.

Fabrication is forecast to fall in the first half of 2009 as economic sluggishness and gold price strength hits all areas except coins.Implied net investment grew by around 20% to a little over 200 tonnes in 2008. The first half accounted for the vast majority of this as investors then reacted strongly to bank failures, a weak dollar, rising oil prices and so forth. In contrast, the third quarter saw net selling, chiefly due to heavy fund redemptions stemming from such factors as the need to cover losses elsewhere. This was eventually overcome by an end year surge in demand centred on physical bullion and driven by risk aversion or wealth preservation.

Such factors are forecast to drive the implied figure higher in the first half of 2009 to almost 400 tonnes. Bar hoarding also grew strongly in 2008, thanks to a robust second half, and further year-on-year gains are forecast in the first half of 2009. Producer de-hedging fell by a provisional 23% to just under 350 tonnes, cutting the outstanding global hedge book at year end to under 500 tonnes. The vast bulk of activity took place in the first half and was attributable to actions by Anglogold Ashanti and Barrick. De-hedging in the first half of this year is forecast to fall heavily, chiefly on account of the much smaller outstanding book.

Happy Digesting.