GOLD:
GOLD MARKET FUNDAMENTALS: Apparently gold hedging dropped by 11% to 43 million ounces in the second quarter of 2006 (versus the prior quarter) and that was apparently the largest quarterly decline on record. With the reduction in hedging and investor interest remaining high for gold, one would expect the supply and demand equation in gold to continue to tighten as the implied supply of gold should continue to tighten, which in turn could support prices. The sharp decline in hedging was evidently largely the result of a significant reduction in hedging by Barrick Gold and AngloGold Ashanti. With Anglo American posting good earnings and planning to return $5 billion to investors, the Press should be rife with stories that should facilitate or attract even more investment to the gold market. While oil prices are lower again today and that in a way reduces some of the flight to quality interest in gold, a good US non Farm payroll could temporarily chase some addition bulls to the sidelines due to currency impacts. However, despite the periodic currency threat, there seems to be an entrenched bullish psychology in the marketplace. In negative supply news overnight, China apparently produced 106 tons of gold in the first half of the current year or a 6.3% increase over the prior year! We are sure that the market will be rife with talk about the liquidation of hedge books, but that move highlights the ongoing bullishness toward prices. While the gold market is only marginally higher early today and the non-farm payroll report could boost the Dollar and make it difficult for gold, we just don't see the up trend ending anytime soon. In fact, seeing the US economy hold together might be the best longer term development the market could see, even though that might cause a temporary backing off of gold prices. In a big picture sense, seeing the energy complex back off could stimulate the global economy in the wake of the central bank rate hikes. However, with oil prices entrenched above $74, the prospect of ongoing inflation and the persistent presence of flight to quality buying interest, it is likely that gold prices will remain positively biased. The front page of the Wall Street Journal this morning talks about money racing to risky energy investments and that in a way highlights the entrenched interest in flight to quality type investments. We can't rule out a temporary dip below $650 into the report this morning, but we seriously doubt that December gold will see a trade below $634. In fact, on a correction this morning, traders should be willing to re-enter the long side or add to long positions.

SILVER:
SILVER MARKET FUNDAMENTALS: While the gold market waffled yesterday the silver market remained mostly positive and that seems to hint at some leadership capacity. In fact, with gold marginally higher to flat early today, the September silver contract was able to post a 9 cent early gain and that again hints at favor. With a silver producer, Silver Wheaton Corp, posting sharply higher earnings in the 2nd quarter, we suspect that silver investments in general are given a lift, but with that company also selling 3.81 million ounces in the quarter, it would seem like the demand for silver remains fairly strong. On the other hand, exchange stocks have regained key psychological levels and that might serve to tone down some of the bullish speculation on the metal today. From a big picture sense, it still seems like the silver market is responding positively to market conditions that project positive economic potentials ahead. In fact, weaker oil and a positive equity market seem to give silver an edge over gold and that might mean the silver bulls today are looking for a not too hot, not too cold US non-farm payroll reading this morning. The silver market has seemingly entrenched itself above the $12.00 level on the charts and we get the sense that the silver market will have a positive correlation with the equity market again today. On the other hand, seeing the September silver manage a climb above $12.27 this morning might ignite another wave of buying in the market. We see the trend to be up, but given the uncertainty off the gold and Dollar action today, we suggest that longs move stops on positions to the $11.35 level and attempt to weather a temporary reaction to the non-farm payroll report.

METALS TECHNICAL OUTLOOK 8/4/2006

COMEX SILVER (SEP) 08/04/2006: Rising stochastics at overbought levels warrant some caution for bulls. The close above the 9-day moving average is a positive short-term indicator for trend. It is a slightly negative indicator that the close was lower than the pivot swing number. The next upside target is 1237.5. The next area of resistance is around 1222.0 and 1237.5, while 1st support hits today at 1196.1 and below there at 1185.5.

COMEX GOLD (DEC) 08/04/2006: Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The close above the 9-day moving average is a positive short-term indicator for trend. The close below the 1st swing support could weigh on the market. The near-term upside objective is at 666.2. The next area of resistance is around 662.0 and 666.2, while 1st support hits today at 652.0 and below there at 646.3.