DAILY US METALS COMMENTARY 09/20/06

METALS: OVERNIGHT CHANGES THROUGH 4:00 AM: GOLD -2.60, SILVER -6.50

London Gold Fix $576.25 -6.25 LME COPPER STKS 123,925 ml tns
+2,100 tons
GOLD stks 7.789 ml oz., -64 oz COMEX SILVER stks 105.5 ml oz
-126,199 oz

OVERNIGHT ACTION: Despite more reports of Asian physical buying interest, the European and US gold markets look to start today's session out softer.

OUTSIDE MARKET DEVELOPMENTS: With the metals market confronted with partially deflationary conditions yesterday and the numbers probably conducive to an oh-hold Fed decision later today, the generally bearish tone toward commodities was given a shelf life. However, while it is possible that the metals will get temporary boost from a Fed Pause, many in the market think that potential impact has already been factored into prices. With the oil market down aggressively yesterday and down rather hard again this morning, it is clear that massive amounts of capital is moving out of oil related investments but so far little of that money seems to be interested in the precious metals. However, the equity market does seem to be benefiting from the sharp slide in oil prices and persistent gains in equities might eventually serve to dampen the negative view toward physical commodities. The US Dollar overnight is slightly lower but remains within striking distance of its recent highs and that is also generally keeping the pressure on metals. It would be a little surprising to see the Dollar manage to rise through the Fed decision today and for that reason some metals traders might expect to see the currency impact actually lend some support to prices later today.

GOLD:
GOLD MARKET FUNDAMENTALS: While the Press was trying to talk up news that lower prices had stimulated Asian jewelry buying overnight, the market doesn't seem to be set to start out on a positive footing. While the lower price structure should eventually attract buying from jewelry users, the environment for physical commodities remains fairly negative and the physical buying interest might at best, only manage to slow the selling tide. However, it is positive that equity pries are responding to lower oil prices, as that could eventually improve the macro economic outlook enough that the trade might become less willing to attack gold aggressively from the short side. Certainly the Indian wedding season could be supportive to gold and certainly news of a possible TB outbreak at South African mines "could" potentially end up impacting gold production, but currently the market only seems to be partially interested in potentially bullish stories. Talk from a major Brokerage about the continuation of the Commodities Super Cycle overnight and the launch of a new gold ETF in Turkey are also potentially supportive items, but again the lack of inflation concerns and views of slower growth directly ahead are difficult to displace. While the Spec and fund long positioning is probably being leveled rather aggressively, the gold market continues to act like a physical commodity, in a slowing global economy. However, it is possible that the $575 level holds some type of value for the market and that sharp declines below that level might be difficult to engineer, unless the macro economic view turns a corner or the TB outbreak in South Africa manages to become a realissue. In the mean time, fresh longs might have to risk positions to at least $559 in the December contract and that suggests fresh long positions probably have to be entered at lower levels than what is expected at the opening today. The market is getting closer to a fundamental and technical low, but more time and price action on the downside might be required to forge a solid low.

SILVER:
SILVER MARKET FUNDAMENTALS: While the equity market is higher early today and possibly benefiting from the sharp ongoing slide in energy prices, the silver and other physical commodities just don't seem to be in a position yet to benefit from that development. In fact, with the copper market seeing a sharp additional washout this morning, and the copper market generally viewed as a tight supply market, it is clear that the physical demand driven component of the silver market, is willing to press prices even lower. In fact, with the flight to quality and inflationary conditions very benign, the investment "hope" is about the only supportive theme available to silver in the near term. Given the last positioning report and the declines in prices seen since that report was measured, some traders are suggesting that the silver market is getting closer to a balanced technical position, but many traders still concede to the potential for more stop loss selling, especially if the outlook for the economy remains soft. With a minor new low for the move overnight and outside metals market action remaining weak, there are few signs of a quick end to the selling wave. In fact, we doubt that the silver market will even get much support off a pause from the Fed and that highlights the generally bearish bias. In fact, so far gains in the equity market haven't improved the outlook toward the economy notably and therefore it is probably premature to think that silver has found a bottom. However, we don't see the need to pressure December silver below support at $10.57 and it is possible that initial support of $10.86 could actually hold up in today's action.

METALS TECHNICAL OUTLOOK 9/20/2006

COMEX SILVER (DEC) 09/20/2006: Daily stochastics declining into oversold territory suggest the selling may be drying up soon. The market's short-term trend is negative as the close remains below the 9-day moving average. The market setup is somewhat negative with the close under the 1st swing support. The next downside objective is 1064.3. The next area of resistance is around 1113.5 and 1140.3, while 1st support hits today at 1075.5 and below there at 1064.3.

COMEX GOLD (DEC) 09/20/2006: Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. The market's close below the 9-day moving average is an indication the short-term trend remains negative. The market's close below the 1st swing support number suggests a moderately negative setup for today. The next downside objective is now at 576.9. The market is approaching oversold levels on an RSI reading under 30. The next area of resistance is around 587.3 and 593.4, while 1st support hits today at 579.1 and below there at 576.9.