DAILY US METALS COMMENTARY 09/18/06

METALS: OVERNIGHT CHANGES THROUGH 4:00 AM: GOLD +3.70, SILVER +17.50

London Gold Fix $581.50 +2.90 LME COPPER STKS 121,825 ml tns
+825 tons
GOLD stks 8.019 ml oz., -588 oz COMEX SILVER stks 105.6 ml oz
+784,456 oz

OVERNIGHT ACTION: London and Hong Kong Gold up marginally on short covering interest.

OUTSIDE MARKET DEVELOPMENTS: With the Dollar slightly lower and world equity markets marginally higher, the outlook for the precious metals markets might be improved from last week. However, oil prices are mixed to weaker and may continue to be a drag and many in the market are looking ahead to this week's FOMC meeting with some concern. While the trade generally thinks that the Fed will pause on rates, seeing a move would certainly rekindle concerns of over tightening, which in the past has been undermining to metals prices. There is also another inflation reading due out this week and considering the mostly muted CPI reading from last week, one can hardly expect much in the way of support from the upcoming inflation reading. However, with the copper market showing signs of strength in the early going today and the equity markets back within striking distance of another upside breakout overnight, the overall environment seems to be moderately less bearish than was seen for most of last week.

GOLD:
GOLD MARKET FUNDAMENTALS: With gold around the lows last week, $72 below the September highs and the Press beginning to play up the idea of improving jewelry demand in India, it is possible that December gold prices will at least temporarily be able to respect levels above $575. Previously Indian dealers were concerned that sharply higher gold prices would discourage strong demand into the festival season and with last week's lows about $90.00 an ounce higher than last September, there is certainly some cause for concern on that front. Some traders think that recent IMF comments will tend to favor Dollar alternatives, which in turn could give the gold a reason to consolidate and perhaps even temporarily mount a short cover rally. On the other hand, the US economic report slate this week, would seem to countervail any short covering impetus, as inflation readings are expected to be muted and until the FOMC meeting is cleared, there might be a tendency to fear a surprise hike from the Fed. In fact, with oil prices generally weak and the markets mostly accepting the idea of falling commodity prices, the bull camp in gold this morning has to fight a bit of an ongoing down trend. The September 12th Commitment of Traders with Options report showed the Gold Non-Commercial position to still be net long 76,142 contracts, with the Non-reportable position also still net long 30,067 contracts for a combined spec and fund long of 106,000 contracts. Therefore, the market remains vulnerable to more long liquidation ahead, especially if the outlook toward the global economy favors slowing. However, the odds of a consolidation above $575 have increased with the bounce off last Friday's lows, but in order to shut off the selling pattern over a series of days, will require a persistently lower Dollar or a persistently higher equity market. Without some strong wave of Indian buying, news of resurgent Chinese activity or some other major fundamental revival, we doubt that December gold will be able to rise above significant overhead resistance up at $600.

SILVER:
SILVER MARKET FUNDAMENTALS: With the gold and copper markets showing moderate gains this morning, the silver market will temporarily sidestep the outside market negatives that were present for most of last week. However, a gradual rise in physical supplies is disconcerting but probably isn't a major focal point of the trade. On the other, hand continued gains in the equity markets and an "on-hold" decision by the Fed later this week could go a long way toward removing the over head resistance on the charts. However, the overall outlook toward physical commodity markets isn't exactly bullish and therefore many traders might view today's gains as a rally in a bear market or simply a temporary short covering move. In many traders' minds, the silver market will have to see a dramatic improvement in the global macro economic outlook to effectively turn sentiment into a bullish track. The September 12th Commitment of Traders with Options report showed the Silver Non-Commercial position to be net long 17,625 contracts and the Non-reportable position also net long 20,379 contracts for a combined spec and fund long of 38,000 contracts. However, despite the sharp break following the COT report mark off, we suspect that the silver market is still vulnerable to more long liquidation ahead. On the other hand, we can't rule out a temporary corrective bounce today but we doubt that the December contract will be able to forge a solid rise above $11.50 without some major improvement in the long term macro economic outlook.

METALS TECHNICAL OUTLOOK 9/18/2006

COMEX SILVER (DEC) 09/18/2006: Daily stochastics are trending lower but have declined into oversold territory. The market's close below the 9-day moving average is an indication the short-term trend remains negative. The market tilt is slightly negative with the close under the pivot. The next downside objective is 1033.8. The 9-day RSI under 30 indicates the market is approaching oversold levels. The next area of resistance is around 1112.5 and 1133.8, while 1st support hits today at 1062.5 and below there at 1033.8.

COMEX GOLD (DEC) 09/18/2006: Daily stochastics declining into oversold territory suggest the selling may be drying up soon. The close below the 9-day moving average is a negative short-term indicator for trend. It is a slightly negative indicator that the close was lower than the pivot swing number. The next downside target is now at 570.9. Some caution in pressing the downside is warranted with the RSI under 30. The next area of resistance is around 588.9 and 594.6, while 1st support hits today at 577.1 and below there at 570.9.