We spent the majority of last week's update outlining reasons why, despite expecting consolidation trading in precious metals, the recent dip would not become catastrophic. We also explored catalysts that could get the bull rally running again. As usual, we focused on the release of Fed-sensitive economic data to mark pivots in price and sentiment. As it played out, the boost metals got on Tuesday from the higher than expected PPI succumbed to profit-taking the next day, essentially text-book consolidation as weak traders yielded long exposure to stronger investors.

What the movements this week revealed was gold hovering about the $620 level, maintaining its position above $600. Silver put in strong support at the $12.30-12.50 level we've been watching for two weeks, just above the September highs. The result is a strong picture that could see the metals continuing to attempt small rallies in the thinner holiday trading with little in the way of significant economic data, though profit-taking and consolidation will probably continue through the new year. Obvious support and resistance levels are present in SLV, which is now trading between its 50 and 200 day moving averages, while GLD rests more comfortably above support at $61.50with plenty of upside potential if a favorable environment appears.

Another factor we discussed last week was the tie between liquidity and Fed funds rates. We've been biased for two weeks now toward an eventual rate hike, rather than a cut, believing that the Fed would rather create liquidity on the open market rather than lower interest rates. This scenario continues to dominate our thinking despite Fed-induced liquidity shrinking minimally in the most recent report. The capital market driving the economy actually seems to be shifting away from inflationary Fed-funds to non-inflationary corporate cash and private equity, which could be the prevailing headwind for precious metals in 2007. In the meantime, while overall liquidity remains high and the dollar low, precious metals should be able to at least remain near current value levels. If the coming year brings expensive oil, geopolitical instability, and/or a recession, however, metals could again outperform the major indexes.