GOLD:
GOLD MARKET FUNDAMENTALS: In the overnight Press, there are a number of conflicting stories on demand, with one report predicting a weakening in physical demand and another predicting an increase in speculative investment demand. In yet another longer term forecast released yesterday afternoon, a private consultant has predicted a large gold surplus in 2007 and that might be given credence by the news overnight of an increase in Harmony gold production for their 1st quarter. While the Harmony increase was only 253 kg, there is the general expectation that physical gold supply is attempting to recover. In the near term, it is clear that the pace of the US and world numbers are a bit undermining and if the oil market remains weak that could begin to eat in the recent edge held by the bull camp. Certainly seeing the December gold contract manage to rise and hold above the critical $600 level has emboldened the bull camp, but given the early weakness today, it would seem like the market has the capacity to fall back under the $600 level due to outside market forces and perhaps because of slowing US numbers. On the other hand, the market might be underpinned by the news that AngloGold has planned to cut back sharply on its hedge book and that in turn could extend the idea of rising implied demand. Apparently AngloGold reduced its hedge book from $3.17 billion at the end of June to just $2.78 billion at the end of September or the equivalent of roughly 646,766 ounces at current prices. In short, the market has a mix of bullish and bearish fundamental news flow, but outside forces seem to be coming down in favor of the bear camp in the early going. While the bulls might be impressed with the rally of the last month, we are concerned with the slowness of the US economy and most specifically with the weakness in oil prices. While the talk of physical demand is present periodically in the Press, we don't think that the talk is as dominate as it was around the October lows. We also fear that the market remains within a general downtrend pattern and without a positive equity market and rising oil prices it is asking a lot of the bull camp to consistently push up prices without a correction. Therefore, in the event that some longs decide to bank profits on the month end today, and or the US numbers are extremely soft, we can't rule out a temporary slide back below the $600 level.

SILVER:
SILVER MARKET FUNDAMENTALS: Without sounding like a broken record it should be noted that silver continues to track in a tight pattern with the gold market. With the gold market also somewhat tracking the oil market and somewhat aware of the slowing pace of US economic numbers, it is not surprising that silver prices are showing some retrenchment in the early action today. After some intense selling pressure in copper prices yesterday, and a demand debate also being seen in the gold market overnight, it is possible that some silver longs are becoming fearful of a slight near term deterioration in silver market fundamentals. Like the gold market, the silver market could see some light month ending profit taking today, as December silver comes into the opening this morning, roughly 48 cents above the October lows. With very little change in physical supplies of silver recently, investment demand stories few and far between and some concerns of economic slowing alive in the headlines, it would seem like the bear camp has more than its share of themes operating in the marketplace. As in the gold market, we suspect that December silver is destined to at least temporarily slide below critical chart support at $12.00, with even lower support seen at $11.88. Even more than the gold market, we think the silver market needs to see equity and energy prices rising in sync. For those that are long term bullish toward silver, you might want to wait for a correction back down to $11.74 before re-entering the long side.

METALS TECHNICAL OUTLOOK 10/31/2006

COMEX SILVER (DEC) 10/31/2006: Daily stochastics have risen into overbought territory which will tend to support reversal action if it occurs. The market's short-term trend is positive on the close above the 9-day moving average. A positive setup occurred with the close over the 1st swing resistance. The next upside objective is 1240.4. The next area of resistance is around 1233.8 and 1240.4, while 1st support hits today at 1216.3 and below there at 1205.4.

COMEX GOLD (DEC) 10/31/2006: Daily stochastics have risen into overbought territory which will tend to support reversal action if it occurs. The market's close above the 9-day moving average suggests the short-term trend remains positive. If yesterday's gap higher on the day session chart holds, additional buying could develop this session. There could be more upside follow through since the market closed above the 2nd swing resistance. The next upside target is 616.9. The next area of resistance is around 611.8 and 616.9, while 1st support hits today at 603.0 and below there at 599.2.