Silver Short Squeeze Scenario 420

Short squeezes often create unstable markets, although a short covering rally based on sudden and consensus buying can also create a major boost to liquidity. This can have the effect of lighting the match that will ultimately detonate the bomb for markets already accustomed to substantial amounts of real or artificial liquidity.

From a technical standpoint, silver is currently consolidating in a tight trading range as the market recovers from an oversold situation. The 14-day RSI currently reads at the 39 level as it hovers above the critical 30 point that it dipped below in April, which could significantly impede additional downside price action.

Furthermore, silver’s price is trading below most of its important moving averages. For example, the closely watched 200 day moving average for silver is currently situated at the $29.98 level, well above the current market price of $22.76. That fact — combined with its pronounced downward slope — indicates a bearish medium term technical outlook for silver.

Silver’s price action is also pretty much uncorrelated with any outside market, as the already far too low silver to gold price ratio falls even further. Volatility has also been declining over the past week or so, as shown by a tightening set of Bollinger Bands®.

Speculators Biased to the Short Side as Squeeze Looms

The price of silver is currently at least five or six times below most conservative, inflation adjusted estimates of its fair value in U.S. Dollar terms.

If large buying interest suddenly emerged overnight, the first set of speculators would cover violently as their buy stops get triggered in classic HFT fashion. The large commercials would then follow, drawing in more widespread buying interest as prices move up and are publicized by the media.

Up until now, the CME has turned a largely blind eye to the unnatural short selling and high volatility that seem inherent in the silver market, much of it caused or exacerbated by huge, algorithmic HFT or High Frequency Trading activity.

In the event of a major short covering rally in silver, would the CME eventually turn against the big shorts in the name of liquidity? They might be forced to take this option in order to distance themselves from J.P. Morgan Chase and their cohorts if the adverse press got too bad to stomach.

Basically, if JPM et al were accused of silver market manipulation in the aftermath of such a rally, the CME might be better off dropping their implicit support for the big banks.

It looks like there is room to run in the event of suddenly higher silver prices, and the Fed pretty much needs an excuse to test whether or not it can cut back on its bond buying without trashing the economy.

Inflation CPI official measures are still below targets. Letting the precious metals run up a bit might bolster the Fed politically, although the problem is managing the size of the resulting short squeeze.

Playing Into Real Market Expectations

The great fear and hope that have been bolstering the price of silver in recent years are the two main emotional reasons investors move their funds into silver. Their dream is that silver would eventually return to fair value before the financial apocalypse occurs.

When the negligible value of paper currency eventually becomes apparent, what does it matter if silver is $500 per ounce in a world where a loaf of bread costs $100?

The fly in the ointment with both precious monetary metals, and with silver even more so, is that the initial overshoot and rush to safety could very well propel both metals far beyond anything resembling their inflation adjusted price. Indeed, at that point, a loaf of bread may very well likely be priced in ounces.

While you admittedly cannot eat an ounce of silver in a crisis, you also cannot eat paper money. Furthermore, an ounce of silver will very likely buy you more food in times of financial trouble than you will then be able to purchase with its current equivalent dollar amount.