GOLD:
GOLD MARKET FUNDAMENTALS: After Tokyo gold fell by the limit overnight and the Chinese hiked interest rates by 27 basis points (effective as of August 19th) it is a little surprising that the sellers aren't dominating the gold market action again this morning. However, the Press is rife with stories predicting the emergence of bargain hunting buying in both gold and platinum, and that seems to have given the bull camp something to embrace this morning after a week of liquidation pressure. In fact, the London Press was even more specific, suggesting that physical buying might be set to emerge as recent declines have apparently attracted some fresh buying interest. In another potentially supportive development, Reuters apparently suggested again that European Central Banks were on a track to sell only a portion of the gold that is allowed to be sold under an agreement made by the central banks. However, some in the trade think that the shortfall of European gold sales by some countries will simply be made up by other central and with another 6 weeks to go before the end of the current quota cycle there is still time for more sales. On the other hand, to a degree, the gold market has already been expecting the banks to sell at their quota (despite recent talk to the contrary) and therefore seeing the banks meet their quota isn't necessarily that bearish. However, in the current environment, the market would certainly attempt to spin any fresh central bank sales into a negative headline event. In conclusion, the market continues to see a slate of potentially bearish themes and only a few potentially supportive fundamentals. With another fresh low for the move and the Chinese rate hike overnight, we have to fear weakness in all physical demand driven commodity markets. While the initial positive correlation between the oil price gain and the gold market is interesting, we are not convinced that the liquidation wave has run its course. In fact, as long as the world's central banks are trying to slow the economy and the US economy at times is showing distinct slowing signs, one has to give the edge to the bear camp. In fact, a return to $615 in the near term would not be surprising. Those long gold had better have options protection against those longs.

SILVER:
SILVER MARKET FUNDAMENTALS: While the technical traders are pointing out the fact that silver seems to have respected the up trend channel support in place since the June lows, the silver rally seems to have come primarily from a temporary bounce in crude oil prices overnight. Furthermore, according to the recently released World Silver survey for 2006, a lack of investment in silver production is potentially going to allow strong ongoing silver investment demand to outstrip silver supply. The bullish World Silver Survey dialogue suggested that silver prices would continue to rise, or in the worst case hold steady in the face of the tightening supply and demand relationships. In the action today, it is a little surprising that the silver market has totally discounted the Chinese interest rate hike and it is also a little surprising that silver seems to be correlating positively with the crude oil market. In general, the silver market would seem to be confronted with about as many bullish fundamental items as bearish fundamental items and that could leave the action in the Dollar and or the US stock market as the critical determinant in the action later today. As suggested already in prior commentary September silver managed to respect an up trend channel overnight but a longer term channel line would seem to allow for a slide all the way down to $11.30 without totally damaging the bull market status. The bulls might also be emboldened by the fact that September silver is also attempting to hold above $12.00 level again. In the end, the silver market is a commodity market and the Chinese rate hike action has been defeating in the past. While we would certainly want to get long silver on a break to $11.30 we are concerned about holding longs at current levels without some form of short call/long put protection as the liquidation threat still hangs in the air.

METALS TECHNICAL OUTLOOK 8/18/2006

COMEX SILVER (SEP) 08/18/2006: Stochastics trending lower at midrange will tend to reinforce a move lower especially if support levels are taken out. The market's close below the 9-day moving average is an indication the short-term trend remains negative. There could be some early pressure today given the market's negative setup with the close below the 2nd swing support. The next downside target is 1168.1. The next area of resistance is around 1220.0 and 1250.0, while 1st support hits today at 1179.1 and below there at 1168.1.

COMEX GOLD (DEC) 08/18/2006: The major trend has turned down with the cross over back below the 60-day moving average. The moving average crossover down (9 below 18) indicates a possible developing short-term downtrend. Daily stochastics are trending lower but have declined into oversold territory. A negative signal for trend short-term was given on a close under the 9-bar moving average. The market is in a bearish position with the close below the 2nd swing support number. The next downside target is now at 610.6. The next area of resistance is around 634.5 and 647.5, while 1st support hits today at 616.1 and below there at 610.6.