GOLD:
GOLD MARKET FUNDAMENTALS: The gold market is seeing a distinct shift in fundamental information today, as the Press floated two potentially critical stories in the early going today. With one source suggesting that Chinese gold reserves are too low again, the question of Chinese central Bank buying is revisited again and that is typically supportive to gold prices or in the least case, it is an underpin for gold prices. In another development, a major gold merger was announced that resulted in one of the issues seeing its stock price raised by 38% and that sends a message that some gold assets and perhaps gold itself is undervalued. The merger further consolidates the production and sales of the gold supply and the communication from the company (Goldcorp) indicated that none of the company's production or reserves would be hedged and that is already widely known but to some, that suggests that the de-hedging pattern continues and physical supply is crimped. Some players might be concerned about an ECB rate hike decision, but it isn't a given that the ECB will hike or that a hike will dampen physical demand or serve to slow the global economy. An ECB rate hike could simply lift the Euro and pressure the Dollar and that could end up being supportive! Therefore, the reaction to the ECB rate decision this morning could be bullish or bearish, but from the overnight strength in prices it already seems that the market is initially trying to be positive, as the trade generally expects the ECB to hike. While some in the Press want to suggest that the gold market is under a cloud of thin trade because of the coming US holiday, we beg to differ as the market has been rather volatile and now has shown the ability to recover in the face of information that could have undermined the bull camp. With the gold market getting Chinese gold reserve talk and the big gold company merger, the gold market gets some badly needed bullish buzz and that seems to have temporarily offset the negative track seen early in the week from the slowing growth arena. While the bulls might have a near term edge we are just not sure that gold prices are going to rise sharply without flight to quality conditions, growth expectations, inflationary concerns and other supportive themes operating in the background. We remain long term bullish but we are still unwilling to throw off our concern of some near term weakness.

SILVER:
SILVER MARKET FUNDAMENTALS: Despite a potentially overbought condition in silver from the prior session, the silver market has shown the capacity to extend the gains and in the process the market has forged a quasi upside breakout on the charts. With the gold market benefiting from another merger and the silver market generally shaking off the recent evidence of slowing global activity, it is clear that the market is discounting the negatives and embracing the positives. It is also somewhat impressive that the silver market has been able to discount the evidence of economic slowing and in general discount periodic weakness in copper prices. With the upside action overnight some players are pointing to the August highs of $12.83 to $12.84 as the next upside resistance area on the charts. In short, silver seems to be benefited from gold strength but the market also continues to give off signs that it is capable of garnering its own focus, separate from the gold market. We can't argue against more upside gains in silver, especially with the market yet to reach the August high resistance zone. As in the gold market, we continue to be long term bullish but short term concerned, as the trend of slowing in the numbers could also be accentuated by an ECB rate hike. As in the gold market, we would suggest that traders hold long futures but look to sell a call and buy a put against the position and that way traders can trade a slow upward price bias and in the process have the potential to cushion the long play against any surprise downside corrective action.

METALS TECHNICAL OUTLOOK 8/31/2006

COMEX SILVER (DEC) 08/31/2006: The moving average crossover up (9 above 18) indicates a possible developing short-term uptrend. The crossover up in the daily stochastics is a bullish signal. Momentum studies are trending higher from mid-range, which should support a move higher if resistance levels are penetrated. The cross over and close above the 18-day moving average indicates the intermediate-term trend has turned up. If yesterday's gap higher on the day session chart holds, additional buying could develop this session. The market has a bullish tilt coming into today's trade with the close above the 2nd swing resistance. The next upside objective is 1288.5. The next area of resistance is around 1281.0 and 1288.5, while 1st support hits today at 1253.1 and below there at 1232.5.

COMEX GOLD (DEC) 08/31/2006: Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. The close below the 9-day moving average is a negative short-term indicator for trend. With the close over the 1st swing resistance number, the market is in a moderately positive position. The next downside objective is now at 617.9. The next area of resistance is around 630.1 and 633.9, while 1st support hits today at 622.1 and below there at 617.9.