Saturday, April 23, 2011

Hi Ho Silver!

Silver prices went ballistic and has virtually outclassed its commodity peers!


I included the S&P 500 (red) and the emerging market benchmark EEM (blue green) [chart from]

The parabolic rise of Silver (51% year to date) may give the impression of a bubble at work. Could be, but other commodities have not been emitting the same signals.

Bubbles usually can be identified by across the board ‘rising tide lifts all boats’ increases. The same dynamic can be seen in a ‘flight to real asset’ phenomenon. The difference is with the subsequent outcomes: a boom goes bust while a crackup boom segues into hyperinflation.

The exemplary performance of silver can also due to another fundamental factor: A massive short squeeze!

Writes Alasdair Macleod of Goldmoney, (bold highlights mine)

There are a few banks with large short positions in silver on the US futures market in quantities that simply cannot be covered by physical stock. The outstanding obligations are far larger than the stock available. The lesson from the London Bridge example is that prices in a bear squeeze can go far higher than anyone reasonably thinks possible. The short position in gold is less visible, being mainly in the unallocated accounts of the bullion banks operating in the LBMA market. But it is there nonetheless, and the bullion banks’ obligations to their bullion-unallocated account holders are far greater than the bullion they actually hold.

But there is one vital difference between my example from the property market of 1974 and gold and silver today. The bear who got caught short of London Bridge Securities was right in principal, because LBS went bust shortly afterwards; but in the case of gold and silver, the acceleration of monetary inflation is underwriting rising prices for both metals, making the position of the bears increasingly exposed as time marches on.

No trend goes in a straight line. So silver prices may endure sharp volatilities in the interim.

However, if the short squeeze fundamental narrative is accurate, which will likely be amplified or compounded by the monetary inflation dynamics, then as the fictional TV hero the Lone Ranger would say,

Hi-yo, Silver! Away!

Post Script:

Here is where Warren Buffett made a big mistake.

Berkshire Hathaway reportedly bought 130 million ounces of silver in 1998 at an average of $5.25 per oz. which he subsequently sold at about $7 in 2006. His ideological aversion to metals made him underestimate Silver’s potentials.

Lesson: ideological blind spots can result to huge opportunity costs.

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