Countdown to the great silver short squeeze?

So, as 2014 gets underway, it seems business as usual in the Previous Metals spectrum what with BoA Merrill Lynch coming out with a price target of $1150 on gold and around $18.50 as an average for 2014. Same old same old…

We can see in the chart below that silver remains mired in the near 3 year bear market and that the price is hovering near the June 2013 lows.

However, we can also diversion in the chart as highlighted in green on the RSI and MACD measures and that is a bullish signal. One other bald statistic is also emboldening our confidence that we are near another sharp rally and that is the most recent CoT data as shown below. Whilst the combined (futures and options) net short positioning is not at the absolute nadirs seen in the Oct – Dec period last year, drilling into the “speculative” (small and large) positioning reveals that there is actually over 40k contracts sold short – almost the same as the figure in June 2013 before the sharp rally that had the price take off by nearly a third.

In fact, the data revealed that in the entire 631-CoT-week history during the secular bull market in silver, only 16 weeks have seen spec shorts over 45k contracts.  Of course, unless these are taken to delivery, ie the speculators find the silver and deliver it the commercial buyers, these shorting extremes must mean revert back to the averages, and before the future comes up for expiry. The front month contract – February – is due for expiry on the 28 Jan 14. 

Between 2009 and 2012 the average speculator short positions has been circa 21.5k contracts. In order to mean revert this means that the shorts are going to have to cover around 24.0k contracts to get back to the average let alone cover the entire short length before expiry. As each contract equates to 5000 ounces per contract, if purely the mean reversion occurred then unless the futures contracts are bought back in the market, delivery of 120.2m ounces is required. Total global mine production in 2012 was around 780m ounces. Where the shorts are going to get nearly 1/6^th of total worldwide production is beyond us. ..

To us, this means that there is, in the next 2 weeks, likely to be a buying crescendo by the specs to cover these shorts as patently they will not deliver the metal. What is needed is a catalyst, and with tomorrow’s non farms data, that just may be it for the bulls…