8/31/2006 8:45:47 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 31, 2006
Impressive bullish action in gold continued overnight despite claims of a pre-holiday atmosphere.
Outside Market Developments:
While the dollar is lower overnight, the net change in the currency wasn't that significant and the correlation between gold and the dollar this week seems to have mitigated. While oil prices are higher overnight, the metals trade is potentially set to be heavily influenced by an extremely heavy flow of scheduled economic information and perhaps as a result of the looming UN/Iranian deadline today. In general, the metals markets have seen a slight softening of U.S. and European numbers, but overall the markets seem to have come to the conclusion that the outlook for the U.S. economy has been improved (despite the numbers) as a result of the news from the U.S. Fed.
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, which 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 percent 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. That is already widely known, but to some it suggests that the de-hedging pattern continues and physical supply is crimped.
Some players might be concerned about an European Central Bank (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, which could end up being supportive! Therefore, the reaction to the ECB rate decision this morning could be bullish or bearish. However, 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 U.S. holiday, we beg to differ as the market has been rather volatile. It has also 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 Market Fundamentals:
Despite a potentially overbought condition in silver from the prior session, the silver market has shown the capacity to extend the gains. 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 – August 31, 2006
Comex Silver (December) August 31, 2006:
The moving average crossover up (nine 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 second swing resistance. The next upside objective is 1288.5. The next area of resistance is around 1281.0 and 1288.5, while first support hits today at 1253.1 and below there at 1232.5.
Comex Gold (December) August 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 nine-day moving average is a negative short-term indicator for trend. With the close over the first 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 first support hits today at 622.1 and below there at 617.9.
*** 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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