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April 17, 2006
Why Not Squeeze The Charmin?
By Brady Willett

On December 5, 2005 I speculated that the ‘odds of gold squeeze [were] on the rise’, and that ‘the price of silver could quickly double’. Just over four months later and the price of gold is up by more than $100 an ounce and silver is up by more than 60%.

Why was December 5, 2005 a notable date in the precious metals bull? Because by December 5 the price of gold had surged through a key psychological barrier ($500 an ounce) with no sign of excessive small speculation, the COT was showing signs of losing their once unflappable grip on the market, and NYMEX was unsuccessfully trying to rig the game (on Nov 28, 05 NYMEX raised margin requirements on gold and silver; a move that, arguably, has been done on a timely basis in the past to help the commercials). 

Compared to December 5 how does today stack up?

Well, NYMEX raised silver margin requirements again last week, the gold commercials have taken a beating trying to guard the psychologically significant $600 an ounce level, and the ever-short silver commercials are being slaughtered. Add to this the fact that precious metals are receiving positive press coverage, the US Dollar isn’t exactly well liked any longer, and that new commodities/precious metals investment vehicles are popping up around the world, and what you get is an even more potent recipe for a short covering spree today than was present December 5, 2005.

Squeeze The Silver!

The net commercial short position on silver (futures & options) sits at 349 million ounces, and silver warehouse stocks - not all of which would immediately be available for delivery mind you – are at 124 million ounces.  Although the total global inventory situation for silver is not known, that a new silver ETF may gobble up 130 million ounces leaves little doubt that an already tight silver market could get even tighter.  If the commercials are ever forced to cover how, and at what price, will they be able to procure the metal???

In what was one of the most effective ad campaigns ever, Mr. Wipple asked grocery shoppers, ‘Please don't squeeze the Charmin’.  Ever since the COT proved incapable of pounding silver lower at will, the market seems to asking why not squeeze silver?

Strong Buy or Buyer Beware?

Proctor and Gamble claims that in 1979 Mr. Wipple was the third best-known American, behind only Richard Nixon and Billy Graham.  Also in 1979, the price of silver, thanks to the Hunt brothers trying to corner the market, soared from $5 an ounce to more than $50 an ounce.

Bold buying from brothers in arms with wealthy Arab investors is not required to send the price of silver even higher in 2006.  Rather, commercial covering intermixed with some defaults, or continued mania buying could do the trick. Quite frankly, if enough investors ask ‘why not squeeze the commercials?’ $50 an ounce is exactly what we could soon see.

These squeeze speculations aside, be aware that it is possible precious metals are rallying not only because some deeply pocketed players are trying to bring about a short squeeze, but also because the Iran/oil situation is being absorbed by speculators in the most optimistic of lights (i.e. an Iran attack means oil is going to $100+ a barrel and gold is going to $850+ an ounce!). Thus, until the commercials cry uncle, until lease rates skyrocket, and/or until US dollar hegemony is more seriously tested, there remains the possibility that a massive commercial engineered sell off is around the corner.

In short, try to squeeze the Charmin if you must, but just don’t be surprised if Mr. Wipple pulls out a shotgun on you.  Unlike Mr. Wipple, the forces that don’t want silver to squeezed are ruthless and in a bad mood.

Disclosure: Todd and I took profits on some gold/silver earlier this year. We continue to own gold/silver coins and bullion.