April 23, 2006
– A series of disparate events have coalesced that have
set the stage for generational price spikes in not one, not
two, but in three major metals. For those who have steadfastly
held their gold and silver positions through the difficult,
trying and heart-wrenching past five plus years, it appears
that our foresight and suffering will soon be rewarded. Similarly,
for those who early recognized the explosive potential of
the copper market, they too are participants in what I believe
will be viewed as an historic short squeeze.
For new investors to the stock and commodity
markets, a speculator who believes that an item will go down
in price has the ability to sell it without owning it. This
is called shorting a market. If he is correct he will profit
by the difference between where he initiated his “short”,
and the price when he “covered” or closed out
his position. A short squeeze begins when a number of individuals
or entities have “shorted” a market in a substantial
fashion, and find themselves on the wrong side of the trade.
In their haste to purchase the item and exit their trades,
they literally fall over one another and markedly drive higher
A good example occurred in the silver market
between late1979 and early 1980. Prior to the summer of 1979,
Bunker and Herbert Hunt of the Hunt oil family, accumulated
an enormous silver position. As I recall, it was largely completed
by the summer of 1979, when silver was under about $8 an ounce.
Prior to and during this period many commercial interests,
traders, and speculators shorted a huge number of silver future
contracts as it rose in price. They believed there was sufficient
readily available physical silver to offset their positions.
If they were correct they would pocket the difference when
the market declined under the pressure of their massive shorting
efforts, as it had done so many times before. Unfortunately
for the shorts, this time they were dead wrong.
By September, 1979, silver broke above $10.
This attracted world-wide buying of the white metal by investors
and speculators who had been watching from the sidelines.
They had seen silver languish, but grudgingly trend higher
for a number of years.
The metal traded below $1.50 an ounce early
in the decade. By the mid-1970's, it worked its way into the
$5 range. When it finally broke through $10, few interested
onlookers wanted to continue “to miss the boat”.
Investor after speculator then plunged into the market in
order to secure their silver.
This pressured the shorts! With each up-tick
in the metal’s price their positions went deeper into
the red. Finally, by December, 1979, silver surpassed $20.
When this occurred the shorts who had not yet exited the market
began to panic. They had already scoured the globe attempting
to find adequate silver stockpiles to cover their positions.
However, the Hunt brothers had beaten them to the act. The
Hunts had left few stones unturned in their effort to purchase
all of the world’s available silver. They had “cornered
This placed the shorts in an untenable position.
They had already sustained enormous losses, and were now faced
with bankruptcy if the white metal continued higher in price.
By now the shorts had joined the excited, greed-driven
buyers of the metal. The purchasers were fearful of missing
further profits, and the remaining short players were trying
to fend off their financial Armageddon. By early February,
1980, only a few brief months later, silver peaked at $52.50
an ounce on the New York Commodity Exchange. When that price
was struck the only direction for the market was down. By
this time numerous shorts were devastated.
Some background. In the early 1960's, the United
States government possessed a silver stockpile of about 2
billion ounces. During the latter part of that decade our
leaders decided that it no longer needed such a substantial
amount of silver, and began to sell most of it into the market.
Their weekly sales ended early in the 1970's decade, and only
left our country with a limited strategic stockpile earmarked
for our national security.
Beginning in the mid-late 1980's and running
to date, the world incurred an annual silver supply deficit.
Yearly demand exceeded production and silver recovery from
all sources by 50 to150 million ounces. The difference was
made up from above ground known and secreted sources.
Several years ago it became obvious to me that
at some point the world would run out of sufficient silver
to supply its needs. I stated my belief that when that time
arrived silver would skyrocket in price. I believe that we
have now arrived at the demarcation point where all of the
readily available silver has been all but consumed.
Of possibly greater importance is that the future
of silver’s price will be further impacted by another
factor. That is the enormous short position that is currently
For the past few decades it has been a safe
bet for various commercial interests, bullion banks and others
to short silver whenever it ran up in price. They understood
silver like few others because most of them were major daily
players in the white metal’s market. This group repeatedly
profited on the short side because from experience, they knew
that they would eventually be able to access sufficient silver
supplies to offset their sales.
To their detriment this group was apparently
lulled into complacency due to their earlier successes in
acquiring silver in a timely fashion. They ignored the fundamental
ongoing supply deficit that would one day upend their lucrative
trade. I have read statements that there is a overhanging
world short position in excess of 1 billion ounces of silver.
Where will it come from when the shorts need it?
Turning to gold, the yellow metal has been
in an annual supply shortfall for about 15 years. It is presently
running at about 1,000 tonnes annually. Further, it has been
stated by Frank Venerosa and the Gold Anti-Trust Action Committee
(GATA) that the world’s major governments have loaned
out as much as half of their stated 30 thousand tonne gold
hoard. This gold has been sold into the market but must one
day be repaid to their rightful government owners. Additionally,
there are additional millions of ounces of the yellow metal
that has been shorted on the commodity exchanges, or are otherwise
owed via naked call options or other derivative methods. These
are on the books of various bullion banks, gold mining companies
and other entities who underestimated the great groundswell
of demand that would one day target the eternal metal.
To further confirm the underpinning of gold’s
strength is its recent price action. As I discussed when gold
first attacked the $500 mark, it should have been met with
great overhead resistance! However, the fact that it overcame
that level and continued skyward with nary a pause, indicates
the great global thirst for the metal.
Each price reversal was met with enormous buying.
It appears that numerous substantial entities have given up
accumulating the yellow metal in an orderly fashion. They
now seem to have thrown in the towel and are rushing to purchase
whatever quantities they can on any price dip. If this is
the correct analysis, it is the reason why any price weakness
will likely be muted in time and depth as gold trends higher
in its current upwave.
Finally we have copper. In my November, 2005
issue of Financial Insights I discussed copper in depth. I
mentioned the usual obvious reason for its great global demand;
the insatiable demand from China, India, Brazil, the United
States etc., its supply vs. demand shortfall, as well as the
continuing decline in its above ground stocks. These seemed
likely to be the underlying factors supporting its theretofore
meteoric rise, and suggested to me even loftier future prices.
However, what peaked my interest and compelled
me to discuss this metal was the actual decline in the net
commercial short position. Copper had risen from the low $0.60
range in late 2001, to its then price in the mid-$1.80's.
Yet with copper posting new all-time highs, the shorts were
nowhere to be seen. It was as if they were afraid to bet against
The situation clarified a few weeks later.
A rumor surfaced that China’s major copper trader was
short between 100,000 and 200,000 tonnes of the metal. I stated
in my December, 2005 newsletter that, “It remains to
be seen what the outcome will be. However, I believe that
it is likely that there is a massive short position overhanging
the market, that has the potential to drive it significantly
With gold and silver, their fifteen year to
two decade long supply deficits have created an extremely
tight market. Copper’s supply deficit has only existed
since 2003. However, the overwhelming copper demand appears
to have quickly consumed literally all of the above ground
This does not even take into account the amount
of physical gold that is being taken from the market by the
gold exchange traded funds (ETFs), and that will be purchased
by the first approaching silver ETF and future ones. Further,
the potential explosive price advances, that the supply deficits
for each of these metals has the ability to engender, may
be greatly extended if the great short positions unwind in
one or all of their markets.
Another item that will further propel these
markets higher is the recent action of the U.S. dollar. As
depicted by the U.S. Dollar Index, it appears to be on the
verge of finally breaking down! This indicates the potential
for new lows. If this index breaks its earlier support of
just over 0.80, be prepared for a new burst of strength in
all of these metals. It will raise the yen, euro, pound, yuan
and all other currency prices of these metals, and further
attract speculators from all nations into the fray. Additionally,
it will signal potential domestic inflation and a flight from
The final piece to the puzzle appears to have
fallen into place. It is the action of the open interest on
the commodity exchanges for each of these markets. The open
interest indicates the number of outstanding contracts for
a given commodity. During important bull advances the open
interest tends to expand as an increasing number of investors
and speculators enter the market. However, in the recent cases
for gold, silver and copper, they have contracted.
Gold’s open interest on the New York
Commodity Exchange (Comex) peaked when it was trading at about
$475. Silver’s struck its highest level when the white
metal traded at about $8. For copper, it’s open interest
posted its high when the red metal touched $1.50.
Gold, silver and copper are now trading at over
33%, 50% and 100% respectively, above the points where they
posted their peak open interest levels. This can likely only
indicate one thing! And, that is the trapped short-sellers
are running for cover, and are exiting the market.
When an earlier short seller makes a purchase
to close his position, he must be replaced by a new seller.
This is because every commodity market contract must have
a buyer for every seller. The reason why the open interests
in these metals are not expanding is because the short players
are closing their positions as fast, if not faster, than new
traders can enter the market. Had the short sellers not been
covering their earlier sales, the new buyers would create
an increase in the total open interest.
If my analysis is correct the fireworks have
just begun. We will likely continue to experience violent
price movements in all of these metals as we experienced late
last week. As waves of short-covering end, new short sellers
will pound the markets. Conversely, when one or more major
shorts panic in their effort to limit their already enormous
losses, these metals will soar.
Gold suffered a major $20 plus decline and silver
gave up over $2 last Thursday. These serious price reversals
should normally require a few or more weeks for the metals
to recover and overcome the technical damage done to their
markets. If they shortly post new highs it will confirm that
a short squeeze is indeed likely in progress.
It is impossible to predict the timing or the
heights to which gold, silver or copper will spiral before
the final shorts cover their positions. However, beware of
a rule change on the Comex. In early 1980, the board of governors
of the Comex changed the rules for silver when it was exploding
higher. They announced that only liquidation orders would
be accepted. With that edict silver plummeted limit down for
nearly two weeks and trapped the longs. Numerous long players
with substantial paper profits were decimated while many short-sellers
were spared from annihilation.
Finally, I anticipate when gold, silver and
copper post their highs the stage will be set for a prolonged
secondary correction in each of their markets. If we have
a repeat of the1970's price action, we will have to endure
an extended decline that may see these markets lose 50% of
their peak values. However, do not despair. When the lows
arrive they will present those who sold within 20% of the
market peaks with great profits. These can be utilized to
reposition oneself and profit, when these three major secular
Bull Markets again reassert themselves. This, on their way
to their ultimate, higher peaks a few or more years later.
The above was excerpted from the
May 2006 issue of Financial Insights © April 23, 2006.
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold,
the financial markets, as well as various junior resource
stocks that I believe offer great price appreciation potential.
Please visit my website www.financialinsights.org
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I expect to have positions in many
of the stocks that I discuss in these letters, and I will
always disclose them to you. In essence,
I will be putting my money where my mouth is! However, if
this troubles you please avoid those that I own! I will attempt
wherever possible, to offer stocks that I believe will allow
my subscribers to participate without unduly affecting the
stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to
beginning purchasers of these stocks, the following: always
place limit orders when making purchases. If you don't, you
run the risk of paying too much because you may inadvertently
and unnecessarily raise the price. It may take a little patience,
but in the long run you will save yourself a significant sum
of money. In order to have a chance for success in this market,
you must spread your risk among several companies. To that
end, you should divide your available risk money
into equal increments. These are all speculations!
Never invest any money in these stocks that you could not
afford to lose all of.
Please call the companies regularly.
They are controlling your investments.
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