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but if you have a partnership, they are not freely given, are they?
Nofollow is supposed to be about tagging links on your own site where you are not 100% sure if the target page/site can be trusted.
"I can vouch for the links. They are quality. "
Would you give the link if there were no pagerank considerations, no ranking considerations, no carefully chosen anchor text and no reciprocity? Really and truly?
In your opinion, as used by Matt Cutts, are "Link spam," "spammy links," and "unnatural links" one and the same? In essence, do they not refer to "links intended to manipulate page rank"?
I read google's own guidelines here
I suggest you also read the article linked to in the Paid Links section of the above document... More information on Google's stance on paid links [support.google.com]...
Here are several sections that jump out at me as fitting the kind of interlinking you describe...
- Excessive link exchanges ("Link to me and I'll link to you") or partner pages exclusively for the sake of cross-linking
- Large-scale article marketing or guest posting campaigns with keyword-rich anchor text links
My emphasis added...Additionally, creating links that weren’t editorially placed or vouched for by the site’s owner on a page, otherwise known as unnatural links, can be considered a violation of our guidelines.
Google is certainly aware of your setup, and it doesn't sound to me as if they'd like it.
That said, you don't describe a traditional Penguin or Panda drop on a known date. It's possible that you're seeing the effects of gradual discounting of your backlinks. It's not clear what your overall link profile looks like (links from places beyond the news site), what the news site's overall link profile looks like, what the sources of your traffic are, etc. These are things you should try to consider.
While our forum's monthly update reference is currently under maintenance, it could still be helpful to you in identifying patterns up until Panda 2.0....
Monthly Reference - Google Updates and SERP Changes
More recently patterns (as Google's updates have become more continuous), are less clear than they used to be. From the very incomplete view I have of your situation, though, I think I would nofollow the links, assuming... as you say... that you don't need them for ranking. IMO, there's more chance that they're hurting you than helping.
I can't say whether they're the only problem you have. I'm thinking you need to analyze visitor interaction with your site and where your traffic is coming from much more than you suggest you're doing. You don't mention any use of anything but Google, eg, to drive traffic.
"At this point, how do people get follow links these days."
The reciprocal links its self consider as spammy, don't go further activity on this.
"In addition - a lot of the people giving "advice" here (Planet13, RCharlton, etc.) I believe do not do link exchanges and simply state their opinions based on theory not practice."