GOLD:
GOLD MARKET FUNDAMENTALS: With the fighting in Lebanon continuing with intensity, crude oil prices soaring off a temporary US supply disruption in Alaska and Iran suggesting they are poised to expand their nuclear enrichment efforts, there seems to be plenty of geopolitical issues favoring the bull camp this morning. With the silver market getting favorable week end coverage in Barron's and AngloGold Ashanti suggesting this morning that they intend to reduce their hedge book further in the face of further price gains in gold, there would seem to be a number of fundamentals set to drive gold higher. In fact, with AngloGold Ashanti raising its un-hedged gold production to 87%, from just 75% in the prior year, buyers of gold are basically left without firm commitments and the amount of implied forward supply of gold is technically reduced. In another positive note, Harmony mines posted 4th quarter gold production of 554,373 ounces, compared to 561,477 ounces in the prior period. In a negative note, Chinese gold production for the January through June time frame rose 6%, but the market was partially aware of that development last week. In late breaking news, there seems to be an "agreement" for a cease fire in Lebanon, but before the petition has had time to circulate, there seems to be a huge debate on the elements of the plan and that would seem to suggest that it might be another session or two before there is a real threat of a halt in the tensions. Even if there is a cease fire deal, there is no guarantee that the fighting will halt and flight to quality interest in gold will wane quickly. Finally, it is possible that the gold trade will simply look ahead to the Tuesday FOMC meeting and see that event as a positive, as the trade largely thinks that the Fed is set to leave interest rates steady. While the gold market comes into the action today net spec long 142,000 contracts, the market is mostly within striking distance of the level where the COT report was measured and that suggested that the two week change in the spec long was virtually nil and the longs might only be marginally overbought and marginally vulnerable. In fact, with the flight to quality interest running hot and most of the fundamentals and the headlines favoring the bull camp, we have to think that the up trend channel in effect since early June will allow December gold to stay on track for a trade above $675 this week. However, it is possible that gold will see a temporary setback to $650 on its way to $675.

SILVER:
SILVER MARKET FUNDAMENTALS: With the Silver market featured in Barron's in a favorable light, the new Calpers Investment Chief very upbeat toward commodities and gold providing positive leadership this morning, it is a little surprising that silver isn't showing more favorable early action. However, the silver market is probably a touch overbought following last week's sharp and impressive gains. That Barron's article highlighted a fresh 23 year high in the metal and more importantly pointed out a long list of developments that demonstrate a broad based investment favor in silver and that should help the market get over part of its short term over bought technical status. In our opinion, the most important discussion in the Barron's article was the news that a silver ETF had garnered $1.2 billion in silver holdings in a short period of time and that highlights surging investment interest and that also serves to tighten the world supply and demand condition in the silver market. In the end, silver is being seen as a financial asset again and therefore, weakness in equities, strength in oil prices and weakness in the US Dollar could facilitate even more investment interest in the future. While the August 1st Commitment of Traders with Options report showed the Silver Non-Commercial position to be net long 20,253 contracts and the Non-reportable position net long 21,704 contracts, the market comes into the action this morning moderately above the level where the last report was calculated and that probably means that the net spec long is probably above 51,000 contracts. However, with the record spec and fund long position in silver at 97,000 contracts, this market is only minimally overbought, which in turn means that silver remains a long way from being "bought out". In fact, considering the fresh Press coverage this morning, it is possible that another layer of fresh buyers will be prepared to enter the silver market on the next correction. In the mean time, September silver should have initial support at $12.29 and it might have little resistance until the $12.65 level.

METALS TECHNICAL OUTLOOK 8/7/2006

COMEX SILVER (SEP) 08/07/2006: Studies are showing positive momentum but are now in overbought territory, so some caution is warranted. The market's short-term trend is positive on the close above the 9-day moving average. The gap up on the day session chart gave a bullish indicator and more follow through could be seen this session. The market's close above the 2nd swing resistance number is a bullish indication. The near-term upside target is at 1280.0. With a reading over 70, the 9-day RSI is approaching overbought levels. The next area of resistance is around 1264.0 and 1280.0, while 1st support hits today at 1233.1 and below there at 1218.1.

COMEX GOLD (DEC) 08/07/2006: Momentum studies are rising from mid-range, which could accelerate a move higher if resistance levels are penetrated. A positive signal for trend short-term was given on a close over the 9-bar moving average. The market could take on a defensive posture with the daily closing price reversal down. It is a slightly negative indicator that the close was under the swing pivot. The near-term upside objective is at 668.8. The next area of resistance is around 661.2 and 668.8, while 1st support hits today at 650.8 and below there at 647.9.