Shorts in gold and silver are trappedDow Theory Letters' Richard Russell said: "...Gold is now in one of the most powerful bull markets that I've ever seen, and I've seen a lot of bull markets in my 81 years. This gold bull market far surpasses in strength the gold bull market of the 1970s. This bull market is far bigger, it's far more international, and it has much stronger and broader fundamentals than did the bull market of the '70s."
Why? Russell and others say that increases of these proportions - on comparatively light Comex volume, and with speculator involvement as measured by the Comex open interest actually going down - scream a short squeeze
This is exactly what Bill Murphy of the online servicewww.lemetropoecaf.com has been predicting for several years and is now gleefully proclaiming. For the first time this week his views were reported in the New York Times and The Wall Street Journal. See lemetropolecafe.com.
Some observers reflexively presume that this means the action will soon be over. Russell I think once again gives invaluable perspective. On Wednesday he wrote: "I do think at least part of the rise in gold (and silver) could be coming from short covering...but why are these shorts covering? Why can't they just sit tight and wait for weakness?
" Ah, the answer is that the fundamentals are in favor of the ... the primary trend of the precious metals has turned bullish. Shorting against the primary trend of any item is a ticket to disaster. ... The precious metals short sellers are aligned AGAINST the primary trend. That's why they can't sit. That's why they are being forced to cover.
"Thus the shorts in gold and silver are trapped, and it's just a matter of how or which way they are forced to cover. Yes, the primary trend is subject to corrections, but in bull markets the corrections are always temporary, and in due time the items advance to new highs."
This makes sense. A short squeeze, like a pair of scissors, has two components. In any market, professional traders occasionally trap one another, settle, and move on. But if the buying stems from what Russell calls "primary" causes (Iran fears, for example?) the shorts have a serious problem.