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Silver squeeze developing?

Gene Arensberg, in his latest Got Gold Report, sees signs “that the chances for an important and historic supply squeeze for physical silver metal developing have increased materially.” Arensberg’s biweekly Got Gold Report is one of the best analytical looks at the gold and silver markets, and his views on the markets provide great insight for investors.

In support of his silver squeeze theory, Arensberg notes that the large gold futures traders (LCs) “have been reducing their collective net short positioning at a fast clip and those same commercial traders now hold a really quite small net short position for silver historically speaking.” For readers new to “LCs” and “commercial traders,” these primarily are the largest U.S. banks that have precious metals trading desks. They are the same “bullion banks” that have long been blamed for manipulating the prices of gold and silver.

I do not dismiss these charges. For years I have watched gold and silver prices “in the short term!” move as the bullion banks’ positions would indicate prices should move, both up and down. Now, Arensberg cites bullion banks’ silver positions as favorable to silver investors. He also notes other developments that suggest a silver squeeze is in the works. It is Arensberg’s recommendation that “any significant to strong dips for silver should be accumulated opportunistically.”

However, Arensberg throws out this caveat: “We cannot know yet if general knowledge of that supply shortage will surface right away or if it will take yet more time to become acute enough to make into the mainstream press, bit it sure does look like it’s coming and we want to be there for it  ‘in size’ when it arrives.”

In the Tuesday 4/7/09 CFTC Commitment of Traders report (COT), it was revealed that the LCs reduced their collective net short positions (LCNS) by a large 3,522 contracts or 10.6% to 25,581 contracts of net short exposure. That is a “really quite low 31.77%” of the all outstanding contracts. As recently as early 2008, the LCs held nearly 90,000 short contracts, which was 65% of the total outstanding contracts. The LCs are quite clearly reducing their exposure to the short side of the silver market.

For further evidence of the developing short squeeze, Arensberg notes that silver inventories at the COMEX depositories have been in free fall over the past month, dropping to around 116 million total ounces as of last Thursday. Last fall, all COMEX depositories held just under 140 million ounces. Analysts other than Arensberg believe that falling COMEX inventory is a direct indication of supply constriction.

Arensberg also notes “a very tight, nearly flat contango in the forward futures,” often an indication of developing shortages in the physicals markets. Contango is a term used in the futures markets to describe an upward-sloping forward curve that shows far futures delivery contract prices relative to nearer contract months. An upward-sloping curve is normal because the “cost of carrying” far-out contracts is higher than the cost of carrying near-term contracts. When the contango is flat, it is an indication of higher near-term contract prices (and the cash market).

Arensberg’s Bottom Line

With the silver futures contango as flat as a slate pool table, rapidly dropping silver inventories at the COMEX, with the COMEX commercials apparently in a hurry to reduce their net short positioning and with extremely high premiums and spotty availability for retail physical silver products, we have to give silver a more bullish bias going forward.

Arensberg’s complete Got Gold Report can be found on It is excellent reading for gold and silver investors. By the way, Arensberg is long-term bullish on gold but sees short-term weakness, which he discusses in his report. He thinks that any short-term downside move in gold could drag silver along, making for excellent entry points for investors to buy buy silver bullion.