GOLD:
GOLD MARKET FUNDAMENTALS: It would seem like the gold market managed at least a portion of its recent gains off a broad based flight to quality theme. In fact, it is a little surprising that the metals markets were able to rise in the face of what appears to be slackening US economic activity and perhaps some concerns of slowing in China. However, with China raising their required reserve requirement again overnight, (this time to 9%) it is possible that some in the metals trade will take that as a sign that China will indeed have to eventually raise their gold reserves. Countervailing the flight to quality/inflation buying theme from the action earlier this week, are suggestions overnight that high prices for Indian gold and a let down following the festival season, might result in a temporary lull in Indian jewelry demand. In another negative overnight development, a Dutch bank study is suggesting that the gold market will see weak demand in 2007 and that supply will overmatch demand. In fact, the report suggested that gold supply would fall by 159 tonnes in 2007, while demand would fall by a larger 303 tonnes. In another apparently "re-cycled" bearish story, the Press is once again pointing to the potential for a longer term increase in Russian gold production to 220 to 250 tons by 2013, (from a 2005 production tally of only 166 tons). However, rising Russian gold production for 2013, is simply too far out, to be much of a concern for the current gold trade. In the near term, the gold market looks to have another chance to spin fundamentals today, as a slightly better than expected US payroll reading could bail out the Dollar or it could be seen as a positive indication for physical or investment demand in gold. While gold might be able to rise off a slack US payroll reading, that would seem to be a more difficult undertaking. Certainly the gold market is overbought from a short term perspective, but with this markets ability to transition to alternative fundamental focuses, we get the sense that the trade will attempt to weave through the report this morning with a positive result. In fact, the combination of leveling productivity and sharply rising Unit labor costs, suggests that inflation remains a problem in the US and could get worse, despite the recent evidence of slowing. However, if we were long gold, we would wrap up the position ahead of the payrolls, with a short December gold $645 call for 800 and a long December $625 put for 1300, or a net premium outlay of $500. In the event that the market decides to bank some profits, look to bank profits on the options and continue to hold the long gold play. Critical support today comes in at $626.4 and $624 level but a major failure isn't seen unless prices fail to hold above $621 in the first two hours of trade today.

SILVER:
SILVER MARKET FUNDAMENTALS: With the December silver contract managing another new high for the move and some market players suggesting that the $13.00 level is the next resistance point, it would seem like the bias in prices remains up. While the platinum market has exploded over the last two sessions, we suspect that the silver market has only seen a minimal spill over from that action, as the silver market still seems to be looking directly to gold. In fact, while the platinum market is getting a lift from talk of a new platinum ETF vehicle, it would seem like silver and gold prices have recently been primarily lifted by a renewed wave of inflationary or flight to quality buying. However, the current rally is a bit of a conundrum, as the buying interest at times seems to be off inflation, but against the back drop of slowing numbers, that story seems to have some cracks in its logic. However, with the US Unit labor costs rising, productivity declining and the added combination of slowing, it is certainly logical for silver and gold to be bid up in a flight to quality fashion. In other words, under the current conditions, the world seems to be a little concerned about how the US Fed is going to balance the risk off too much slowing and the potential need to hike interest rates again. In the end, the US payroll report today could create an extreme volatile trading session today. We see critical support into the opening this morning around the $12.64 level but really solid support might not be seen until the $12.51 level. With the December silver contract 71 cents off this weeks low, the market is certainly short term overbought, but given the adaptable stance of the bull camp in silver and gold over the last two weeks, the odds that the market will weave its way through the numbers today, with a positive result, looks to be high. However, as we suggested in the gold market, those long silver futures should consider selling a December silver $13.00 call for 37 cents and use that premium to purchase a December silver $12.25 put for 32 cents.

METALS TECHNICAL OUTLOOK 11/3/2006

COMEX SILVER (DEC) 11/03/2006: Rising stochastics at overbought levels warrant some caution for bulls. The close above the 9-day moving average is a positive short-term indicator for trend. Market positioning is positive with the close over the 1st swing resistance. The next upside target is 1283.3. The market is approaching overbought levels with an RSI over 70. The next area of resistance is around 1276.5 and 1283.3, while 1st support hits today at 1253.5 and below there at 1237.3.

COMEX GOLD (DEC) 11/03/2006: Rising stochastics at overbought levels warrant some caution for bulls. The market's close above the 9-day moving average suggests the short-term trend remains positive. A positive setup occurred with the close over the 1st swing resistance. The next upside objective is 636.5. The market is becoming somewhat overbought now that the RSI is over 70. The next area of resistance is around 633.4 and 636.5, while 1st support hits today at 622.2 and below there at 614.0.