GOLD:
GOLD MARKET FUNDAMENTALS: With the December gold contract reaching the highest level since October 3rd and starting the week out with a quasi gap higher trade, it would certainly seem like last week's bullishness remains in play. Certainly seeing December crude oil start out firm and having the generally supportive action from the equity market last week threatens the deflationary/slow growth camp in gold, but it still doesn't seem like the trade is fully engaged in the bullish mentality yet. In fact, many traders suggest that without a stronger macro economic outlook it will probably take a definitive trend reversal in the energy complex, just to take gold from a short covering market, into a weak up trending market. Certainly the bull camp is emboldened by the fact that December gold has managed to attempt a return to the vicinity of a key psychological price level "around" $600, but other traders suggest that the bears will retain the upper hand until some key technical points are regained on the charts. Unfortunately for the bull camp, those key technical points, the even number $600 level, the down trend channel line and the 200 day moving and are still above the current market this morning at $600, $611.8 and $616.4 respectively. On the other hand, the market has mounted a $34 per ounce rally off the October lows and really hasn't had much support from physical demand talk or from the threat of tightening supply. Therefore the October bounce in prices would seem to insinuate that the gold market bounce has simply been a function of the trade becoming uncomfortable with December gold prices down at the recent lows of $562, instead of some new found bullish toward prices. The October 10th Commitment of Traders with Options report showed the Gold Non-Commercial position to be net long 55,764 contracts, with the Non-reportable position net long 23,266 contracts for a combined spec and fund long of 79,000 contracts and that positioning is probably understated due to the $20 per ounce rally that was forged since the COT report was measured. However, we get the sense that the gold market has become comfortable with a net spec long position in the 70,000 to 115,000 contract range and it should also be noted that December gold has for almost 6 of the last 12 months showed respect for the $575 level. With a potential bottoming in oil prices and a gradual improvement in the global economic outlook, we have to think that equilibrium pricing in December gold is indeed at or above $575. However, one still can't rule out temporary re-tests of the $566 level, but in general we expect the gold market to be able to hold above that level. In fact, despite the recent strength it is still probably premature to call for an end to the down trend pattern that has been in effect since July. Close-in support rises to $589 and resistance is seen at $600 and then again at $609.1.

SILVER:
SILVER MARKET FUNDAMENTALS: With the sweeping rally last Friday in December silver pushing the market back above the 200 day moving average and the market seemingly poised to retest the late September consolidation high zone around $11.81 to $11.86, one gets the sense that the technicals start the week out supporting the bull case. From the fundamental front, the silver market is supported by talk from the 5th International Silver Conference, which apparently cited the prospect of very strong demand from China, Russia and India. Apparently presenters at that Conference predicted a doubling of silver demand over the coming "years" and that should help the market facilitate it recent upside price action. In fact, with the silver market recently finding support from hope that Indian silver imports were going to rise, the favorable demand forecasts from that Conference take on some added importance. With the gold market in a more positive posture and oil prices firm this morning, it is possible that ongoing sideways to lower price action in December copper will be discounted somewhat. Apparently Asian traders expect the silver market to run into fairly significant overhead resistance around those late September highs but in the mean time, it would seem like the trade is interested in pushing silver prices up to that resistance. While the October 10th Commitment of Traders with Options report showed the Silver Non-Commercial position to be net long 16,021 contracts and the Non-reportable position to also be net long 18,449 contracts, the combined spec and fund long position of 33,000 contracts is certainly balanced enough to allow for some more near term gains. However, we are a little concerned about the lack of favorable direction from the copper market and given the magnitude of the early September slide in silver prices and the periodic concern of deflation, the silver market needs all the outside help it can muster just to keep the sellers at bay. In the mean time, the path of least resistance is pointing upward in December silver, at least until the $11.86 level is tested.

METALS TECHNICAL OUTLOOK 10/16/2006

COMEX SILVER (DEC) 10/16/2006: Momentum studies are trending higher from mid-range, which should support a move higher if resistance levels are penetrated. The close above the 9-day moving average is a positive short-term indicator for trend. The gap up on the day session chart gave a bullish indicator and more follow through could be seen this session. Since the close was above the 2nd swing resistance number, the market's posture is bullish and could see more upside follow-through early in the session. The near-term upside objective is at 1183.4. The next area of resistance is around 1176.8 and 1183.4, while 1st support hits today at 1159.3 and below there at 1148.4.

COMEX GOLD (DEC) 10/16/2006: The daily stochastics have crossed over up which is a bullish indication. Positive momentum studies in the neutral zone will tend to reinforce higher price action. The cross over and close above the 18-day moving average indicates the intermediate-term trend has turned up. Follow through buying looks likely if the market can hold yesterday's gap on the day session chart. The market has a bullish tilt coming into today's trade with the close above the 2nd swing resistance. The near-term upside target is at 598.4. The next area of resistance is around 596.0 and 598.4, while 1st support hits today at 589.4 and below there at 585.2.