How to Profit from the Upcoming Short Squeeze in Silver
By Jason Hamlin
Silver chat rooms are ablaze with talk of a short squeeze that will send the price of silver back above $20 in short order. I believe it is only a matter of time and not so much a question of if, but when it will occur. The price of silver is far below fundamental supply/demand would dictate and there are plenty of signs of manipulation taking place.
But whether you agree with the manipulation argument or not, it is easy to see that the current gold/silver ratio is way out of whack at 60. Historically, the ratio averages closer to 15 and even further from the current ratio is the production ratio around 9 and the geological ratio around 7.
What does it all mean? One reasonable assumption would be that the silver price has some catching up to do in order to return to its equilibrium or more natural price relationship to gold. Using the most conservative of estimates, the price of silver should be fetching around $60 per ounce! Even if you believe the price of gold is overvalued and should be closer to $750, which still gives us a silver price of $50. Any way that you look at it, silver is way undervalued versus gold.
These abnormalities are typically caused by some form of artificial interference and always have a way of working their way out and returning to levels dictated by free market economic forces. From the current price of $17.75, silver would enjoy a 341% price increase to reach $60. While this sounds a bit far-fetched, it could happen more rapidly than you can imagine.
Paper short positions in silver (up to 800 million ounces) are several times larger than all of the annual physical investor demand for silver (50-100 million ounces). And the majority of these paper shorts are held by only a few investment banks, with JP Morgan being the principal culprit. So, if investors start to demand delivery and paper shorts scramble to cover, $60 silver is suddenly not such a far-fetched theory. I will direct you to the archives of Jason Hommel or Ted Butler if you want to dive deeper into the numbers. And be sure to check out GATA for a wealth of information and documentation supporting the manipulation argument.
Another bullish indicator for silver is the current backwardation that has been running for nearly 40 days. That means that the price for immediate delivery has been consistently higher than the price for future delivery. Gold and silver occasionally slip into backwardation, but rarely for this long. Two articles referenced in the following paragraphs provide more information on backwardation and why it is bullish for precious metal prices.
So we have an extremely out of whack gold/silver ratio, paper short positions that cannot be sustained or delivered upon and backwardation running for nearly 40 days in a row. The manipulators are simply holding down a spring and the more hands (paper promises) that join in attempting to hold down the spring, the stronger the reaction will be when they are finally overwhelmed. It creates the potential for a truly explosive move in silver that will provide little warning and little time to jump onboard.
You need to be positioned before the spring pops or kettle explodes as the volatile nature of the silver market will not provide a gradual ride that you can simply jump aboard at your leisure.
James Turk reports on the extraordinary amount of stress in the silver market, saying:
“No one is stepping in to sell physical silver in exchange for future delivery, so there is only one possible conclusion. There is not sufficient physical silver available at current prices to meet demand. So unless the shorts can somehow come up with the physical silver they need to meet their obligations to deliver and thereby relieve the backwardation, the price of silver needs to climb higher. It needs to rise high enough to induce holders of physical silver to sell their metal, which the shorts need to buy to meet their obligations to deliver.”
Ted Butler also wrote an article a few days ago suggesting that it was crunch time for silver.
“Allow me to summarize what all these micro and macro signs of wholesale shortage mean to silver investors. Quite simply, it means that the price of silver should explode soon. If the short-term signs I see, both micro and macro, are true representations of what is occurring with supply and demand, then it may be crunch time in silver. If that’s the case, buckle up and get ready for the ride of your life.”
I sincerely believe fortunes are going to be made by those holding silver mining stocks [and silver bullion] over the next two years. The kettle is about to blow the top off and it has been a long time coming.
All Things Considered – John’s Commentary:
Jason raises two points that I couldn’t agree with more fully. First, silver will outperform gold at least four times in the early to middle stages of this bull market. Second, the gold/silver ratio presents tremendous opportunities by “swapping” between each as the ratio moves up and down. I have used this very strategy to increase my personal holdings 45% without any additional cash outlay. If you would like to learn more about this strategy, or why silver is such a tremendous value, please call me.
Fisher Precious Metals
www.FisherPM.com
(954) 358-3536
