GOLD:
GOLD MARKET FUNDAMENTALS: With the Press touting physical buying interest around the globe overnight and a couple noted Brokerages (Goldman and US Trust) suggesting that renewed Chinese demand is set to underpin many commodities ahead, it would seem like the bull camp is getting help from the headlines. In fact, overnight some Press outlets were even suggesting that the Fed might still struggle to control inflation, despite the threat of slowing and that would seem to rekindle the flight to quality element that for most purposes has been dormant for at least a couple of weeks. While crude oil prices are somewhat lower in the early action today, part of the renewed inflation concern is seemingly coming from the idea that resurgent oil prices will eventually rekindle pricing pressures. However, with OPEC apparently passing on the issuance of an official Statement this morning, one gets the sense that they were considering some type of supportive dialogue, but then backed off and that seems to have deflated oil prices in the early action. On the other hand, with the economic Press this morning carrying stories of the potential for a soft or hard landing in the US economy, the bearish early September environment hasn't been completely erased. In conclusion, the bulls seem to have the edge early in the action, but that edge is thin. While the idea of strong physical demand is keeping the bear camp back on its heels, the market can't afford deterioration in the economic outlook. In fact, with the September 26th Commitment of Traders with Options report showing the Gold Non-Commercial position to be net long 66,298 contracts and the Non-reportable position also net long 27,488 contracts, the combined spec long was a partially overdone 93,786 contracts. Furthermore, the net spec long position in the COT report was probably understated given that the market mounted a modest rally after the report was measured. In short, the fundamentals and the technicals aren't nearly as negative as was seen in the first half of September, but we hardly see the justification for a broad sweeping rally! In short, we can't argue against some slow grinding gains, but the bull camp still seems to need constant help and distraction from the idea of slowing growth and falling inflation. The $600 level in the December contract will continue to be an important bull bear line this week.

SILVER:
SILVER MARKET FUNDAMENTALS: With the stories predicting resurgent Chinese demand for commodities, silver and copper are supported. With gold managing to start the week out on a positive note and the equity markets also giving off a bit of favorable action this morning, it would seem like the bull camp in silver holds a minor edge. However, the silver market will have to contend with news overnight of an 11.8% increase in Mexican July silver production. Fortunately for the bull camp in silver, the market hasn't been overly fixated on the physical supply and demand factors, or the Mexican production news could have been damaging to prices. On the other hand, the silver market can hardly afford to be cavalier about supply and demand, especially with the macro economic condition currently being questioned on several fronts. Certainly the pattern of higher lows and the track toward the 100 day moving average leaves the bulls optimistic, but in order to extend the rally off the September lows, the silver market will need more demand stories like the Indian import story from last week just to keep the sellers at bay. The September 26th Commitment of Traders with Options report showed the Silver Non-Commercial position to be net long only 15,392 contracts, with the Non-reportable position also net long 19,277 contracts for a combined spec and fund long of 34,669 contracts. With the COT data probably understating the magnitude of the long position in silver and the outlook for the economy oscillating back and forth from good to bad, the bulls have to be a bit nervous, even if they appear to start the week out in control of prices. In our opinion, the silver market will continue to track in the footsteps of copper and the equity market and therefore the December contract looks to have solid resistance at $11.85 and thin support down at $11.52.

METALS TECHNICAL OUTLOOK 10/2/2006

COMEX SILVER (DEC) 10/02/2006: 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 close below the 1st swing support could weigh on the market. The next upside objective is 1191.8. The next area of resistance is around 1173.5 and 1191.8, while 1st support hits today at 1134.5 and below there at 1113.8.

COMEX GOLD (DEC) 10/02/2006: Momentum studies are trending higher from mid-range, which should support a move higher if resistance levels are penetrated. The market's short-term trend is positive on the close above the 9-day moving average. The market setup is somewhat negative with the close under the 1st swing support. The near-term upside objective is at 611.8. The next area of resistance is around 608.2 and 611.8, while 1st support hits today at 600.2 and below there at 595.9.