Buy Silver Now Before the Short Squeeze Blows Prices Through the Roof

Silver value today is not consistent with its underlying fundamentals of supply and demand. The high demand and strictly limited remaining supplies both above-ground and below-ground are going to ignite a silver prices explosion in the near future. This article explains one of the six primary reasons silver prices are about to undergo a tremendous increase.

The first reason silver prices are going to take off in the near future is the coming “Short Squeeze” on the futures market.

In the futures market, speculators can sell futures contract for delivery of a fixed amount of silver (i.e., 5,000 troy ounces per contract) in the future even though they don’t own 5,000 ounces of silver. In most cases (i.e., pretty much all cases except with companies that actually mine and produce silver), the contracts are bought back to cover the shorted contract before the delivery date.

For example, a speculator could “sell a December 2010 COMEX Silver contract” in March for so many dollars per ounce even though he doesn’t own any silver and doesn’t expect to actually deliver any. The sold contract commits the speculator to actually deliver 5,000 troy ounces by a certain day in December 2010.

If the speculator doesn’t buy the contract back (hopefully at a lower price than he sold it), he is legally required to deliver the silver. However, he can buy back the contract and cancel the transaction. Of course, for the speculator to buy the contract back means there has to be someone willing to sell the contract to him. Finding a seller is not normally a problem in the futures market, because there are actually producers of silver willing and able to deliver the silver.

However, silver is an extremely useful metal used in many, many industrial applications, and unfortunately, most of those applications actually use up the silver… in other words, it no longer exists after using it.

Furthermore, the world demand and usage of silver is about double the current world production rate, and the U.S. Geological Survey has stated below-ground (i.e., not mined yet) supplies of silver are less than any other metal. So, we have a high-demand metal with a strictly limited supply.

This means eventually miners will no longer be able to deliver 5,000 troy ounces of silver either.

To make things even worse, for the last 20+ years, there have been an inordinate number of shorted futures contracts on silver in the New York Commodity Exchange (i.e., COMEX). In fact, there are more shorted contract positions than can be covered by the current level of production. The total shorted positions to date (hundreds of millions of ounces) is much, much larger than the current deliverable inventory of silver.

To date, this has not been a problem, because world governments have covered the deliveries through existing inventories. But now those inventories are generally non-existent. We have essentially consumed the last 5,000 years of mined silver; it’s all gone (except that used for jewelry, ornamental stuff, and silver coins).

When the shortage of real silver becomes apparent, speculators who shorted silver contracts will have to buy back their positions. The increased demand to buy back the silver contracts will push prices up (remember, higher demand with lower supplies results in higher prices). Furthermore, we are already seeing signs of the limited supplies through delayed physical deliveries.

This increase in price forces even more people to buy back their contracts since they will lose money on positions already sold when the prices rises. This phenomenon in shorted positions (including shorted stocks as well as futures) is called a “Short Squeeze”.

When this “Short Squeeze” kicks in, a panic ensues; this effect alone could drive silver prices to triple digits. When this happens, if you own silver… real silver… your investments will skyrocket. If you bought at today’s prices, when silver prices rise to as little as $100 per ounce, you will realize a 400% profit!

Buy silver now while it’s still cheap!

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