Silver short positions outnumber the bull positions by a 2-1 ratio, those are the people that need to buy with every passing day that they get deeper and deeper underwater by staying short silver. Some traders on wall street see a massive squeeze on the shorts which could send Silver to $40 to $50/oz in as little as 4 months. That puts it right at Jan - March 2011, historically a time when the market usually has its biggest money inflows.
Read Article by : Anathan Thangavel of Lakshmi Capital written 11/11/10
2009 Silver demand outstripped supply. In 2009, the world mined 709 million ounces of silver. On the demand side, 352.2 million ounces were used in industrial applications, 156.6 million ounces for jewelry, 59.5 million ounces in silverware, and 136.9 million ounces for investment. An additional 24.6 million ounces were used in photography and coins.
Extrapolating these data to 2010 yields a compelling reason to buy silver. Subtracting 2009 world silver production from all non-investment uses indicates that there were only 116.1 million ounces of silver production available to satisfy investment demand. Projecting the 2010 data as the same as the 2009 data, if there are only 116.1 million ounces of new silver being mined available to satisfy investment demand, (280.2mm short ounces outstanding from commercial traders minus 116.1mm new ounces being mined = 164.1mm ounce shortfall), where will the remaining 164.1 million ounces come from?
This huge shortfall indicates that the outstanding short position cannot be solely on behalf of producers, because there is a far larger outstanding position than could possibly be hoped to be mined this year. Digging further into the Commitment of Traders report shows that 44.1% of the gross short position in silver is being held by the 4 largest traders. Since JP Morgan and HSBC are rumored to be the 2 largest traders of silver, both banks probably have very significant short positions in silver.
The rumor on the street is that both banks will be forced to cover their shorts, and in doing so drive up the price of silver astonishingly. Some traders I have spoken with are targeting the 40-50 level within 4 months. Adding much intrigue to this rumor is the fact that silver began its most recent breakout the exact same day as JP Morgan announced it would be shutting down its proprietary commodity trading business.
Rumor has it that JP Morgan is just looking to cut its losses in silver and cover its shorts. This could be a possible reason why silver has skyrocketed in the last 2 months. Of course, JP Morgan's involvement in the silver surge is little more than unsubstantiated rumor, but the basic premise still holds true.
Regardless of who actually holds these silver short positions, they will be forced to cover at some point, and this could cause an even larger short squeeze than the one we are currently witnessing, driving silver even higher. Given the recent extreme volume we have witnessed in the silver market, it will be very interesting to see the change in short positions in the next Commitment of Traders report. We continue to be long silver futures and call options for clients, and will add on all pullbacks.