Anatomy of a short squeeze

A short squeeze is one of the reasons my long-term price targets for gold is $6300 and for silver is $400.  The calculations were based on trough-to-peak valuations of other asset bubbles, including the 1970's bull market in precious metals, housing stocks, and internet equities.  Other variables include money supply metrics (M1, M2, M3) relative to above-ground gold reserves.  For silver, the gold/silver ratio falling to normal ranges was the overarching factor.

Of course, if the USDollar collapses, all bets are off, and these seemingly outlandish mental price targets will be proven conservative. 

http://www.goldmoney.com/gold-research/anatomy-of-a-short-squeeze.html

Silver offers the closer parallel with the London Bridge example. 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.

Perhaps the most important lesson we can learn from the LBS situation – and highly applicable to the situation today in precious metals, which could be developing into the largest short squeeze in history – is that very few other people in the investment community actually understand what is happening. This is something to bear in mind when taking investment advice.

See disclaimers in the side bar.  Any price targets are of the opinion of the author only, and should not be used as investment guidelines.

Disclosure:  long precious metals mining shares.