GOLD:
GOLD MARKET FUNDAMENTALS: In addition to overnight headlines in the metals trumpeting the fact that rising oil prices and a sagging Dollar were inspiring buying, the market is also seeing signs of increased physical buying in Asian and that usually gives the market a solid lift into the European and US trading action. It also seems like the Press is set to continue spinning the slow pattern of Central Bank sales into a positive. A number of Asian sources overnight suggest that the majority of the early buying today was the result of Iran's rejection of the UN's request that they halt nuclear activities in exchange for incentives and that certainly points to a flight to quality focus this morning. With the December gold contract at the early high today, $16.40 an ounce above the Friday low, it is clear that the market is on a significant reaction this morning and that could serve to distract the market from the latest COT report readings which showed the gold market to be moderately spec long. In looking ahead this week, the gold market could be presented with a major economic decision, as the US will see a number of housing and home related releases that could clarify whether or not the ultra critical US real estate sector is in trouble, which in turn could support gold off a flight to quality tilt or it could undermine gold from a deflationary or slowing tilt. While the market might have a strong bid this morning, the market looks to remain suspect from the threat of slowing in the US economy. With the August 15th Commitment of Traders with Options report showing the Gold Non-Commercial position net long 99,571 contracts and the Non-reportable position also net long 38,946 contracts, the combined spec and fund long was 138,000 contracts and means the market could quickly become significantly overbought on a rally. While we can't argue against near term upside gains, it is clear that the gold market needs constant support from oil and a sagging Dollar. However, if the US economy is found to be slowing even further, we suspect that gold will be hung up in a range bound by $643 and $610, which is why traders that are long gold futures should continue to maintain short call and long put coverage.

SILVER:
SILVER MARKET FUNDAMENTALS: With silver stocks mostly holding steady over the last month, the silver market hasn't been able to generate that much buzz regarding a tightening of its balance sheet. Therefore, the silver market hasn't exactly managed to correlate tightly with the copper and platinum markets and that seems to have pushed the silver market a little closer to gold over the last month. However, the silver market has been getting relatively better Press coverage than the gold market, especially when it comes to investment projections for the two metals. Many traders are also suggesting that the silver market has consistently seen its spec and fund long readings hold at moderately less overbought levels than the gold market and that has seemingly inspired some fresh metals buying interest into silver as opposed to gold. With the silver in the early trade today, nearly 40 cents above the Friday low, it certainly seems like this mornings opening bid is hinting at a more active week ahead. With the August 15th Commitment of Traders with Options report showing the Silver Non-Commercial position to be net long 24,532 contracts and the Non-reportable position also net long 20,880 contracts, the combined spec and fund positioning was 46,000 contracts and that is only moderately overbought. However, as we suggested in the gold commentary this morning, we are still fearful that evidence of significant US slowing will undermine both gold and silver and that September silver could be held in a range bound by $12.64 and $11.90. However, considering that silver comes into the opening this morning at only $12.24 there does seem to be a near term upside capacity before the market is presented with significant chart resistance.

METALS TECHNICAL OUTLOOK 8/21/2006

COMEX SILVER (SEP) 08/21/2006: Momentum studies trending lower at mid-range could accelerate a price break if support levels are broken. The market's short-term trend is negative as the close remains below the 9-day moving average. It is a slightly negative indicator that the close was lower than the pivot swing number. The next downside target is 1173.5. The next area of resistance is around 1217.0 and 1229.5, while 1st support hits today at 1189.1 and below there at 1173.5.

COMEX GOLD (DEC) 08/21/2006: Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. A negative signal for trend short-term was given on a close under the 9-bar moving average. It is a slightly negative indicator that the close was under the swing pivot. The next downside target is now at 609.9. The next area of resistance is around 627.8 and 634.4, while 1st support hits today at 615.6 and below there at 609.9.