Silver Picking Up Momentum, but Will it Surpass the $40 Level?

The price of silver finally began correcting its impulsive rally that started on Tuesday from the $34.77 level to reach a high of $39.34 on Thursday. With the key $40.00 psychological level providing formidable resistance, the metal sold off sharply and began consolidating in the $38.12 to $38.60 region.

Thursday’s corrective sell off in silver was in part due to a report that Mexican producer Fresnillo was looking to double production through a newly opened mine in Saucito, Zacatecas. The mine was recently inaugurated by Mexican President Felipe Calderon and is forecast to produce 283 tonnes of silver, with 133 tonnes of silver production expected in its first year alone.

Nevertheless, the broader recent rally in silver has come in response to increased risk aversion that has also led to the price of gold making new all time highs. Since precious metals traders focus on the same fundamental factors, both markets have seen increasing demand as traders prefer the long side in the wake of U.S. debt rating downgrade warnings by both the Moody’s and S&P rating agencies.

Additional factors boosting demand for silver include the ongoing and spreading European debt crisis, as well as recent indications by the U.S. Federal Reserve Chairman Ben Bernanke in testimony on Wednesday of the possibility of renewed stimulus measures for the U.S. economy.

These fundamental influences have weakened the U.S. Dollar against other major currencies and have also strengthened the somewhat wary silver market considerably and sent gold into uncharted territory.

Despite the corrective price action to the downside seen on Thursday, it seems that the price of silver has finally begun to stage a tentative recovery after the severe routing the metal market experienced during late April through early May.

Since taking that beating, the silver market had seen prices consolidating at lower levels above the $32.31 mark, although the latest impulsive rally over the last few days seems to have broken this pattern to the upside as the market traded above resistance at $38.83. Key resistance at the $40.00 level now represents the level to surpass for additional upside in silver, with $41.95 and $49.78 seen as further resistance levels above that.

By Barbara Zigah