GOLD:
GOLD MARKET FUNDAMENTALS: August gold reversed sharply yesterday, as profit taking set in after making a new high on the move, its highest since mid-May. The flight to quality argument appeared to have limited power over the market, as a sharply higher dollar and weaker crude oil prices also conspired to pull support out of gold. There was some movement towards finding a solution to the Middle East crisis yesterday, with the UN talking about sending troops and Israel hinting that their requirements for stopping their campaign were easing somewhat. Where previously they had included the complete disarmament of Hezbullah as a requirement, yesterday there were comments that removing them from the Lebanon border are would be sufficient. There was no let-up in Israel's bombing campaign overnight, and their army chief spoke about meeting their goals within weeks, not months, which suggests that they are will not be open to any intervening cease-fire. With a heavy slate of economic information due out from the US this week and especially with a series of inflation readings to be released this week, it is possible that the market gets a clearer picture of the magnitude of slowing in the US economy and that potential might actually serve to increase the risk to fresh longs in gold. Yesterday's release of June Industrial Production numbers was better than expected, which runs counter to expectations for disappointing views on the economy from the US Fed Chairman later this week and pulls support out of gold. China, the world's fourth largest gold producer, produced 88.802 tonnes of gold in the first five months of the year, a 12.4% increase from a year ago. South Africa's DRDGOLD said in an annual report that its 2006 gold reserves are up 35% to 8.8 million oz from 6.5 million in 2005. The July 11th Commitment of Traders with Options report showing the Gold Non-Commercial position to be net long 98,560 contracts and the Non-reportable position also net long 34,926 contracts for a combined spec long of 133,000 contracts, but we suspect it got quite a bit larger than that before the sell off yesterday, suggesting it's not over yet. Retracement support of the June-July rally comes in at 627.40 and eventually 611.95. However, the ongoing Middle East crisis could serve to underpin gold.

SILVER:
SILVER MARKET FUNDAMENTALS: Silver sold off yesterday along with gold. The fact that it held below last week's highs before the sell-off indicated it was more focused on macroeconomic concerns and less on flight to quality. Other industrial metals were also held back, which highlights the fact that the rally off the June lows was mostly short covering and hugely financial in nature. The trade is just not willing to use the silver market as its primary flight to quality market. Silver stock levels have shown little change recently and the macro economic outlook has had a contracting bias. The market got no lift from the June Industrial Production number yesterday, which came in better than expected. Silver does not appear to be overbought given the recent Commitment of Traders with Options reports showing the Silver Non-Commercial position to be net long 19,958 contracts and the Non-reportable position net long 19,212 contracts, well under the record spec and fund long position of 97,000 contracts posted in March of 2004. The overnight low took September silver to its first support of 10.95 (retracement of the June-July rally); next support comes in at 10.69.

METALS TECHNICAL OUTLOOK 7/18/2006

COMEX SILVER (SEP) 07/18/2006: The major trend has turned down with the cross over back below the 40-day moving average. The daily stochastics gave a bearish indicator with a crossover down. Momentum studies are trending lower from high levels which should accelerate a move lower on a break below the 1st swing support. The close below the 9-day moving average is a negative short-term indicator for trend. The gap lower on the day session chart is bearish and puts the market on the defensive. The market is in a bearish position with the close below the 2nd swing support number. The next downside target is now at 1074.8. The next area of resistance is around 1130.5 and 1160.8, while 1st support hits today at 1087.5 and below there at 1074.8.

COMEX GOLD (AUG) 07/18/2006: Rising stochastics at overbought levels warrant some caution for bulls. A positive signal for trend short-term was given on a close over the 9-bar moving average. The close below the 2nd swing support number puts the market on the defensive. The near-term upside objective is at 672.4. The next area of resistance is around 661.3 and 672.4, while 1st support hits today at 642.5 and below there at 634.9.