NEW YORK (Commodity Online): Silver has failed to break resistance at $29 levels in recent times and have seen retracements back to $26 to 26.50 range which have provided solid support on several occasions in the past 18 months, according to Ole S Hansen, Head of Commodity Strategy at Saxo Bank.

Silver tends to track gold quite closely but as the global economic activity have slowed down so has the industrial demand for silver which in turn have seen it underperform gold to the extent that the price relation between the two metals have returned to its five year average at 58 ounce of silver to one ounce of gold.

In the near term speculation about additional stimulus being provided by central banks and continued investment demand holds the key to silvers performance given the uncertain economic outlook, strong mine production and the risk of a stronger dollar which tends to have an adverse impact on prices. Investment demand through Exchange Traded Products (ETP) have proved to be resilient despite the lacklustre price performance with investors currently holding 575 million ounces compared with a record of 599 million in April 2011. Speculative investors, primarily hedge funds, have for now moved onto other investments as they currently hold one of the smallest net-long positions in eight years, according to Ole S Hansen.

On the chart above one can see that silver is balancing on a knife as it is once again approaching the critical support level mentioned above with the added spice that the trend-line from the 2008 can be found within the same area. A break below the September 2011 low at 26.07 could signal a possible extension as sell orders would flood the market and possible take it one to two dollars lower while a rejection should give it enough confidence to retrace back towards resistance at 32. With the risk however being skewed to the downside traders have been positioning themselves through the use of options with out of the money put volatility rising strongly over the last week.