8/30/2006 9:08:05 AM
Schaeffer's Investment Research is pleased to bring you Nell Sloane's "Daily U.S. Metals Commentary." For more about Nell Sloane, go to www.nsfutures.com. You can read this column each morning in our Commodity Center. Views and opinions expressed here are solely those of the author and do not necessarily represent those of Schaeffer's Investment Research.
Daily U.S. Metals Commentary for August 30, 2006
Precious metals posted gains despite a minimal rebound in the U.S. dollar.
Outside Market Developments:
While energy prices are giving off indications of a
little strength this morning, it seemed like the Asian metals markets were bidding
prices up in response to the less hawkish stance from the U.S. Fed yesterday. The
fact that the dollar has managed to maintain price levels in the wake of the Fed
news on Tuesday has surprised some metals traders overnight and the general view
is that the dollar is poised to weaken, even if that result hasn't fully manifest
itself yet in the wake of the FOMC meeting minutes release yesterday afternoon.
With copper prices slightly higher and global equity markets showing some positive
progression recently, the fear of too much slowing in the U.S. seems to have passed
again and that could leave the metals in a generally more supportive environment
ahead.
Gold Market Fundamentals:
Despite a couple of negative fundamental developments
this morning, the gold market is positively biased in the early trade today. In
fact, the gold market seems to have totally discounted the fact that Chinese gold
production was found to have increased by 6.3 percent in the first half of 2006 and it
has also discounted news that a potential supply disruption event at a Peru gold
mining operation was averted with a settlement overnight. In short, it seems like
a portion of the overtly bearish tilt present at the start of the week, has been
reversed because of the less hawkish U.S. Fed and perhaps because the persistently
negative impact from the August sharp slide in oil prices has started to shift
and is now serving to brighten macro economic expectations. In another recent
negative story, the World Gold Council has suggested that Middle East gold demand
in the second quarter declined by 25 percent and also suggested that excessive price
volatility was probably the cause of the reduction in gold demand.
While the press is out this morning with suggestions that geopolitical anxiety is still in the process of calming down, that opinion seems to totally discount the potential
that the actual U.N./Iranian nuke deadline of August 31 will bring about an
escalation of tensions. In fact, the August 31 deadline might actually be the
source of the overnight buying interest in gold, but the press might end up being
correct in their assessment that the U.N. deadline will come and go without a
significant development on the Iranian sanctions issue. In conclusion, the bear
camp seems to have a number of elements in their favor, but the bull camp is
apparently capable of re-gaining temporary control over prices.
With the tight coiling pattern on the charts, the fundamentals mostly negative and the dollar higher this morning, we would suggest that short term traders use the overnight
bounce to get lightly short for more downside work ahead. Eventually lower oil
prices could revive the economy, but in the near term, lower oil prices seems to
mean less uncertainty, less inflation and less flight to quality interest in gold.
In short, those that are short call and long puts against long futures positions
still need the options protection against further potential upcoming declines.
Initial support is seen at $615.5 and then again down at $610. In order to alter
our partially bearish near term outlook, might require a rally in December gold
back above $627.
Silver Market Fundamentals:
While the silver market doesn't seem to be overly
focused on the big picture macro economic outlook for the U.S. economy, it does
seem like silver and copper prices were benefited as a result of the less hawkish
Fed spin on Tuesday afternoon. Furthermore, while the recent slide in oil prices
has generally undermined the precious metals markets (as flight to quality and
inflation longs were forced from position) it is possible that persistent declines
in oil could begin to benefit silver, from the hope that lower oil prices will
rekindle the global economy and in turn improve physical investment and industrial
demand for silver. In the mean time, the market is somewhat vulnerable from a
technical perspective, as the nearby contract has been unable to hold above a
series of widely followed technical indicators and the trade is probably still
aware of the moderate ongoing spec and fund long positioning in silver. In addition to concern over the technicals, the silver market is also presented with some fresh demand concerns this morning, as Japan documented a rather sharp 33 percent decline in silver imports in the month of July, but that negative reading is partially offset by the fact that July 2006 imports were actually 26 percent above the prior year's July imports.
Like gold we remain long term bullish toward silver but the near term setup seems to favor the bear camp. In addition to adverse periodic currency market action, the silver market has periodically fretted over the prospect of over tightening by the U.S. Fed. With the Fed threat somewhat downgraded, the silver market should benefit but as long as the overall macro economic outlook is cautious, it is unlikely that the industrial metals are going to spring higher simply because the Fed is going to give the U.S. economy a bit of room. In the end, we fear a re-test of the lows forged yesterday but we also can't rule out temporary rallies to $12.50 basis the December contract.
Metals Technical Outlook – August 30, 2006
Comex Silver (December) August 30, 2006:
The downside crossover (nine below 18) of the moving
averages suggests a developing short-term downtrend. Momentum studies trending
lower at mid-range could accelerate a price break if support levels are broken.
The market's short-term trend is negative as the close remains below the nine-day
moving average. The upside daily closing price reversal gives the market a bullish
tilt. The close over the pivot swing is a somewhat positive setup. The next
downside objective is now at 1190.1. The next area of resistance is around 1250.2
and 1262.1, while first support hits today at 1214.2 and below there at 1190.1.
Comex Gold (December) August 30, 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 nine-day moving average is an indication the short-term trend remains
negative. It is a slightly negative indicator that the close was under the swing
pivot. The next downside objective is 609.5. The next area of resistance is around
624.3 and 630.4, while first support hits today at 613.9 and below there at
609.5.
*** This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of Hartfield Management, Inc. is strictly prohibited.
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