Market Overview

The Squeeze is On! Silver Continues Its Climb (SLV, UDN, JPM, HSBC)

It would appear as though the silver market is in the midst of a short squeeze. The NYMEX futures price of the commodity rose over 4.5% in Thursday's trading action, closing near the highs of the day. The price of silver has now risen for seven consecutive days, and 15 out of the past 17 trading sessions.

Thursday's surge is just one of many over the past few months, as silver has vaulted from $28.06 per ounce on February 1st to the current price of $46.60 per ounce. That is a staggering gain of 66% in twelve weeks. In that timeframe, silver futures have only had 14 losing sessions out of 57. Underlying silver ETF iShares Silver Trust (NYSE: SLV) has seen shares rise 63.7% from $27.71 to the current price of $45.53 as a result.

The year-over-year price comparisons are even more astounding. As of this date in 2009 and 2010, the price of silver was $12.02 per ounce and $18.07 per ounce respectively. These figures amount to a 157.8% increase in one year, and a 287.7% increase over two years.

These astonishing statistics clearly indicate that something is going on. Some people are citing the weak dollar and inflation concerns as the reason for the climb, while others are pointing to something a bit more sinister – someone is trying to corner the market.

Investor concerns have been steadily building recently, as a number of global issues continue to plague the market. Such apprehensions stem from the sustained, loose monetary policies of the United States, the ongoing financial woes in Europe, and from escalating Middle East conflicts. Seemingly, the response has been a move away from paper currencies into the precious metals arena.

It is important to note that since silver's rapid ascension beginning in February, the dollar has taken a significant hit. In fact, if you compare the six-month daily futures chart of silver to the six month daily chart of the euro/dollar, you will notice that they look almost identical. (If you favor ETF's, compare charts of SLV and the PowerShares DB US Dollar Index Bearish (NYSE: UDN), which goes up when the dollar gets weaker).

If you prefer conspiracy theories, there are whispers that an entity is trying to corner the market similar to the way the Hunt Brothers did back in 1980, or how Warren Buffet did in 1998. These theorists point to the fact that although the dollar has declined recently and has caused an increase in the price of most commodities, the gains in silver have significantly outpaced its counterparts. For example, over the past 12 months, the price of silver has risen 157.8% while gold prices have only risen 31%.

The idea of someone trying to corner the market is not as farfetched as it may seem. After all, the silver market is much smaller in size than most other commodity markets, and, thus, is more volatile and has a higher potential to be manipulated. As noted, it has happened before. More in-depth details about possible culprits can be found here.

Aside from these two lines of thinking, there is one relatively simple explanation – a good old fashioned short squeeze. There has been documentation (as well as speculation) that JP Morgan (NYSE: JPM) and HSBC (NYSE: HBC) have held significant short silver positions since 2008. Since that revelation, the banks have claimed to have wound down those trades, at least in the United States. A report from Zero Hedge last year alleged that instead of actually exiting those shorts, the banks simply transferred them to related non-US banks outside the control of The Commodity Futures Trading Commission (CTFC) in order to escape position limit regulations. More information on this topic can be found here and here.

Whether or not it is, in fact, JP Morgan or HSBC, someone is holding massive short positions in the silver market, and has been getting punished for quite some time. A blow off top is a significant possibility if an entity is forced to liquidate its holdings or if investors begin to demand actual delivery. (Most investors do not accept delivery because they do not have the monetary ability to do so. This is why it is possible for more short contracts to exist than the actual silver the contracts represent).

Whatever idea or theory you choose to believe, one thing cannot be debated (and in reality, the only thing that matters) – silver is on a massive run and is showing no signs of abating. Despite the commodity's remarkable gains over the past two years, it is small compared to the gains experienced in the last silver rush from 1970 to 1980. During that period, silver went from $1.50 per ounce to just under $50 (a 3,233% gain) due to the actions of the infamous Hunt Brothers. After adjusting for inflation, that price would equate to $130 per ounce in today's market. While a short squeeze of that magnitude is highly unlikely, as the markets have shown time and time again, anything is indeed possible.

Posted-In: Long Ideas Short Ideas Futures Technicals Commodities Currency ETFs Forex Hot Best of Benzinga

 

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