A short squeeze in the silver market is pushing prices profoundly higher, the consequence of which could be felt for years.
All told, the month of June has witnessed silver rise by over 12%. But the truly aggressive price action began [last Thursday] – with a single-day move from $19.81 to nearly $21.
Short squeezes occur when short sellers close their positions with a heightened sense of purpose and haste.
[ad#Google Adsense 336×280-IA]Such behavior can cause prices to move sharply higher.
That is, since closing a short position requires one to buy shares.
The increased buying – and subsequent higher prices – force other short sellers to close their positions, too.
Before long, a full-blown short squeeze has commenced, which is exactly what’s presently happening in the silver market.
Silver’s short squeeze, however, has far deeper implications than a short-term bump in prices.
Short squeezes oftentimes signal profound shifts in the underlying sentiment in the market, and sentiment is among the most unheralded contrarian indicators…
Extremely bullish sentiment is a warning signal that the market might be fully saturated, as in, there’s no one left to buy. So when sentiment is at/near all-time highs, the prudent investor will consider tightening his sell stops and taking profits.
Conversely, extremely bearish sentiment can signal a market ready to reverse. And when sentiment is at/near all-time lows, the prudent investor will consider some strategic buying.
I believe silver is experiencing such a sentiment shift right now.
Take a look at the chart below, which perfectly captures how out of favor silver presently is.
Net “long” positions in silver futures are the lowest in history, dating back to 2006 when this data began being tracked.
As it turns out, late 2008 – when sentiment previously bottomed – proved to be an incredible entry point.
I suspect this time will be no different, as the chart below shows how silver just broke its long-term trend line.
At the very least, silver’s “pain threshold” puts a sturdy floor underneath prices at this $21 level.
The pain threshold is the price at which mining operations become profitable.
It currently costs silver miners anywhere from $18 to $21 to extract the metal from the ground. Any price above $21 per ounce goes straight to the bottom line.
In a scenario where prices stall within the pain threshold, weaker mining operations would be forced to shutter their doors. Less silver coming out of the ground and diminished inventories would further speak to higher prices.
It’s hard to see any downside to silver at this juncture, save for an entire breakdown of the commodities complex.
With the odds so stacked in your favor, it’s time to pull the trigger.
Onward and Upward,
Robert Williams
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Source: Wall Street Daily