GOLD:
GOLD MARKET FUNDAMENTALS: While the Dollar wasn't pressured by Fed commentary or soft economic readings yesterday, it would not seem like the generally weak dynamic has changed in the Dollar, especially with the US currency potentially confronted with another sweep of soft scheduled data this morning. Therefore, one probably shouldn't rule out some support for gold from the currency markets but again that might not be the main focal point of the trade. In fact, the gold market might be a bit unnerved by a Press report out of Saudi Arabia this morning suggesting that demand for gold and gold jewelry is falling rather briskly and with the US housing figures this morning potentially poised to reach the lowest level in 2 years, it is possible that the market becomes less concerned about inflationary potentials and more concerned about slower physical demand and deflationary potentials. However, some in the trade are reminding the market that geopolitical problems in Iran back in 1979 prompted gold to rise to $850 an ounce and with the Iranian situation potentially front and center again, it is possible that ongoing flight to quality interest will serve to countervail a softening of physical demand expectations. However, the flight to quality issue will be a double edge sword, in the event that Iran actually backs down or more likely, gives off the appearance of backing down. In a slight shift of recent action, Mumbai gold and silver prices supposedly firmed at the start of the week and that would seem to discount concerns early in the year that high flat prices of gold were discouraging Indian buyers. As we have suggested a number of times over the last 5 days, we think the gold market remains vulnerable to the slowing economy fears and certainly the gold market is vulnerable to serious negotiations with Iran. We see the UN as an ineffective parent, with Iran taking the role of a teenager looking to say anything to avoid punishment, but in the end we doubt that Iran will stop enrichment. In fact, the UN knows that Iran won't stop enrichment (as Iran has plainly indicated that stance over a dozen times in the last month) but France and Germany just don't have the stomach yet to enforce sanctions. In short, we can't rule out a return to $625 and perhaps $616.5 in the event that US numbers are soft and the Dollar doesn't decline. Short term technical indicators would suggest that a dip below $625 might be a nice short term bottom, but fresh longs might have to be risked to at least $615 on a close basis.

SILVER:
SILVER MARKET FUNDAMENTALS: While the story from Indian on Monday regarding a slight improvement in silver demand is helpful, we look at the weakness in the stock market and the strength in the US Treasury market as a sign that the financial markets are sensing moderate slowing in the economy. With the copper market simply unable to extend gains off news that a key strike is extending, it is clear that the physical demand driven metals markets are somewhat out of favor. With the Iranians promising to negotiate, the prospect of flight to quality buying in silver is called into question. However, one has to concede that the early action today points to some relative favor in silver over gold and therefore one might not rule out some type of spread trading benefit to silver prices in the short term. The comments from BHP about entrenched high metals prices and the expectation of solid long term demand patterns, might be prompting buying in silver, as some traders view silver to the cheapest item in a gold, silver and copper comparison. Surprisingly the silver market is showing signs of tracking toward consolidation resistance on the charts of $12.44, but we are not exactly sure what the market is keyed in on and we remain concerned about a negative influence from the Fed, the numbers and temporarily from Iran. We still think that silver is in a long term bull trend, but we can't rule out a temporary setback to 11.78 basis the September contract. In fact, those that are long futures should consider utilizing short call and long put protection until all this talk about softening in the US housing sector is absorbed.

METALS TECHNICAL OUTLOOK 8/23/2006

COMEX SILVER (SEP) 08/23/2006: Stochastics trending lower at midrange will tend to reinforce a move lower especially if support levels are taken out. A positive signal for trend short-term was given on a close over the 9-bar moving average. The market setup is somewhat negative with the close under the 1st swing support. The next downside objective is 1193.8. The next area of resistance is around 1240.5 and 1249.8, while 1st support hits today at 1212.5 and below there at 1193.8.