born2pip's  Instablog

“Gold and silver are money. Everything else is credit.” attr. J P Morgan

The spot price of silver has finally broke 20$ an ounce for the first time in months. This has been a historically significant price for the precious metal. If silver can maintain its price above 20$/ounce for a significant amount of time, it could potentially continue to rise much further. Let's explore why 20$/ounce is significant, and why a breakthrough could herald a large increase in price. In this article, I will argue that the biggest barrier to silver price increase is a technical, rather than fundamental one.

If we look at past price data, we can see how silver has been testing the 20$ range over the past three years.The last time the silver price neared the 20$ level was around the end of May of this year, although the price did 'double top' a month later in late June.

In late 2009, the price of silver had been gathering momentum since July, and looked as though it could test the 20$/ounce level, but just as people began to wonder if this was possible, the price experienced a retrace.

Around March '08 was the last time the metal actually broke the 20$ level, deep into the financial crisis. It came close later that year, but since then there has been no opportunity to break this level.

So, having seen the handful of times silver has tested the 20$ level, why can we say it is a significant price?

From a purely technical point of view, 20$ is a price that, as we have seen, has been tested, and has almost always resisted being broken. Many players who short silver will be setting their stop losses around (probably just above) the 20$ mark. If the silver price breaks this mark, then there is no further clearly defined level of resistance above this. The silver price will be as high as it has ever been in over a decade. From the point of view of a trader who is out to make a profit, 20$ is the most significant price of the past few years.

A key fundamental reason why silver could beat the 20$ price level is its historical relationship with gold. As has been noted, over the last century, the gold to silver ratio averaged out at 1:47. At the moment the ratio stands around the 1:63 mark.When gold smashed the 1250$/ounce level yesterday, I believe it added momentum to the silver price, which is why we are again hovering around the 20$/ounce level. Even so, if silver was to regain its ratio with gold, or at least head in that direction. it's price should experience a significant increase. (I am assuming the value of gold will not decrease significantly when I say this!) Because of this issue, the price of 20$/ounce carries even more significance.

Another fundamental reason why silver could experience significant increases is based on the recent news about silver price suppression. Whilst I am no expert on this topic, it seems as though a number of the larger investment banks (specifically JP Morgan) hold large short positions of silver stocks. Jeff Nielson posts a great article on this topic which can be read here.

Given the climate of uncertainty in the economy at the moment, as well as the high level of liquidity on the currency markets, I think it's no wonder people are flocking to precious metals. I believe the only thing which is stopping silver from breaking the 20$/ounce level is the number of short positions which are placed around that level. If the price can stay near the 20$/ounce level, with high volume, then as long as sentiment remains the same, this level can potentially be broke.