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While silver has launched higher over recent weeks, mining investors have been panic selling, distributing, hedging, and all out running away from probably the most undervalued sector in the market.
While it may be fairly easy to recognize a bottom using technical indicators, Platinum investors have already seen that technical indicators aren’t very good at telling you where the top is. It looks increasingly likely that silver is about to make a platinum run. This could go on for weeks.
The ironic thing is, the silver clouds ahead are showing that what silver investors have been waiting for is actually beginning to happen: An enormous short squeeze in the large commercial traders and industrial users. For years Ted Butler and others have been explaining how powerful commercial traders have been shorting into every silver rally through during the entire bull market thus far. Once the price has risen enough, they pull bids from under the market and force the price of silver to crash in days of gut-wrenching freefalls. Once the price has crashed, the commercials cover their positions at a profit and the cycle begins all over again. This has happened so often that silver mining investors have been programmed like Pavlov’s dog to dump silver miners as soon as silver moves up.
Source: softwarenorth.net
But something different appears to be happening this time. In the past week silver has broken out from its trading range in Euro’s and launched from $17 to $19.50. While it would be expected for the commercials to short more, open interest has plummeted from 189,151 on 2/19/08 to 167,000 on 2/29/08. From 2/19/08 to 2/26/08 the commercial net short positions fell from 75,790 to 73,149. It may take two weeks for the silver COT report to confirm this, however I believe this shows that the large commercial traders have covered an additional 2,000 to 3,000 short silver contracts in the last 3 days – in a classic short squeeze.
Given that silver is at a multi-decade high, it’s fair to say that all short positions are currently under water. Given that silver has risen from 11 to almost 20 in less than six months, and open interest is also at a historical high, it’s also fair to say that the large commercial traders are suffering from major losses in the billions of dollars. Ironically, the very same credit and insolvency problems that are tanking most markets may be the biggest driver in a silver short squeeze. One year ago, banks had excessive liquidity to back up short sales and derivative manipulation of silver. However, today banks are likely to close out any positions that don’t immediately create a profit for them because they are desperate to raise cash in order to survive.
This implies that silver could launch much, much higher over a very short period of time. It also implies that everyone waiting for silver to crash before they buy could be very disappointed as it could create a new price baseline above current levels in the coming months.
I have read several articles recently arguing that investors should sell their miners and buy silver instead. While I do believe investors should hold a core position of silver, given the current valuation of silver miners, I think its untimely advice. That might have been great advice in 2007, but we have finally reached the point of price insanity in the mining sector. Most silver miners are priced as if silver was $13, and it looks unlikely that silver will fall to those levels ever again given that the 200 day moving average is $14.17 and screaming higher. If silver prices hold $20 this year, many silver producers will have PE ratios under 10 at their current prices.
Chris Mack writes the Mack Report and can be
reached at mackreport@gmail.com
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