GOLD:
GOLD MARKET FUNDAMENTALS: While the market is showing some distinct weakness this morning, part of the selling interest could be coming off simple profit taking from the recent compacted rally. Fundamentally, the gold market should be supported by the overnight news, as a former Chinese Central Bank member has suggested that China move to raise its reserves of gold. The former Chinese Central Banker did not suggest how much gold China should hold, but with the story clearly suggesting that China should diversify away from the US Dollar, one would expect gold to get an added benefit from the discussions. In another positive fundamental note overnight, the gold mining giant GoldFields posted a net income jump of 42% and perhaps more importantly indicated that production dropped by 0.5% to 1.02 million ounces. Apparently Uzbekistan seized some Newmont Mining assets and has also halted some gold shipments from that country,, because of a tax dispute and that could be considered another factor coming down in favor of the bull camp. In Asia, the trade was apparently confronted with some selling from jewelry players and the market was also confronted by some scrap gold sales and that might be the real source of the overnight selling bias. We must continue to note that the Press is rife with stories about gold being a solid portfolio component in the current uncertain environment, and that mentality should continue to underpin gold prices. With some buyers yesterday apparently buying gold off the concern of another damaging hurricane approaching the US, and the track of the storm now thought to be south of the US and the storm weakening, it is also possible that some storm longs in gold are exiting this morning. While we see a much larger flow of supportive fundamental information in the overnight news than bearish news, the market was somewhat overbought from a short term technical condition and it deserves some type of back and fill. However, there is a long list of supportive elements in place and investors globally seem to be bullishly biased toward gold and that should keep the up trend in place. If there is any evidence that China will move to raise gold reserves that will probably cement gold prices above $700, but in the near term the most important influence looks to be the standing of the US Dollar into the coming monthly payroll reading and the ECB meeting. However, in addition to the uncertainty over the direction of the US economy, the gold market also has the Lebanon war, the potential for Iranian sanctions, Chinese buying and several other fundamental themes that could drive prices upward. In conclusion, traders should look to corrections of $8 to $13 to get long or add to existing long positions.

SILVER:
SILVER MARKET FUNDAMENTALS: Like the gold market, the silver market has mounted a very significant $1.82 rally from the July low to the recent high and that has to leave the market somewhat overbought technically. However, as mentioned in the gold coverage today, there is a broad list of supportive fundamental conditions that are apparently channeling investment and speculative money toward silver and the environment looks to foster those conditions instead of truncating those conditions. In a partially negative note, silver stocks posted a significant rise overnight but still managed to hold below critical psychological levels. While the trade suggests that the market has initial support at the even number level of $12.00, the amount of volatility present in the marketplace probably reduces the effectiveness of close-in support and resistance. Pan American silver reported a record net profit of 15 million in the second quarter, but the company also increased production by 7% and also noted beginning work on a new mine! Therefore, while the financial and geopolitical elements remain generally supportive to silver, the classic supply fundamentals this morning are a touch bearish into the US action today. While we continue to think that the silver market is set to trend higher, the market is somewhat overbought and has also seen a bit of negative fundamental news overnight. Therefore, it would not be surprising to see the market forge some back and fill action on the charts. As suggested before, the trade thinks that the $12.00 level will offer up some initial support but a lower support level of $11.82 could also be tested in the wake of a temporary Dollar driven washout in the gold market. However, as we suggested in the gold guidance today, traders should be long silver or looking to get long silver on corrections to $11.98, with an objective of $13.00.

METALS TECHNICAL OUTLOOK 8/3/2006

COMEX SILVER (SEP) 08/03/2006: The upside crossover (9 above 18) of the moving averages suggests a developing short-term uptrend. Momentum studies are trending higher but have entered overbought levels. The close above the 9-day moving average is a positive short-term indicator for trend. Since the close was above the 2nd swing resistance number, the market's posture is bullish and could see more upside follow-through early in the session. The next upside objective is 1266.5. The 9-day RSI over 70 indicates the market is approaching overbought levels. The next area of resistance is around 1251.0 and 1266.5, while 1st support hits today at 1198.1 and below there at 1160.5.

COMEX GOLD (AUG) 08/03/2006: Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The market's short-term trend is positive on the close above the 9-day moving average. With the close higher than the pivot swing number, the market is in a slightly bullish posture. The near-term upside objective is at 660.9. The next area of resistance is around 656.3 and 660.9, while 1st support hits today at 646.9 and below there at 642.0.