Could Supply And Demand Be On A Collision Course In Gold and Silver

March 22, 2010 – A “naked Short Sale” is the sale of something that you don’t actually own. Although over 99% of the population will never sell short anything in their lives, it is a common practice in commodities such as; crude, Gold and Silver. At present Silver has the largest short position of anything that has ever existed. Short positions measure in the billions of ounces, that far exceeds the world’s readily available supply.

This exaggerated short position is the cornerstone of what could be a “silver accident”, and lead to a financial windfall for those positioned in Silver. Short sales, like those in Gold and Silver, are open transactions – unlike when you buy a car, a house, or a new pair of sneakers, where you deliver cash and take immediate possession of a tangible item – a closed transaction. Accounting rules mandate that all open transactions must eventually close. In a short sale, the transaction can close one of two ways:

1) You can take delivery of said product (in this case Silver).

2) The issuer can repurchase said product (again Silver)

As I mentioned, Silver shorts measure in the billions of ounces. The COMEX warehouses house 100 million ounces, which represents almost all the known silver bullion in the world today. Although the exact number is not known, estimates place the world’s silver count somewhere around 1 billion ounces, this includes coins, small bars, and silverware. Most of this is not eligible for delivery against the short positions.

Since the world’s silver supply excludes delivery as an option to close the open silver short transactions, remember all open transactions must be closed, this can only leaves option two (buying back the position by the sellers) as a viable means for closing the transaction.

The only way they can achieve buying back the position is to inflate the price, making the urge to resell and take profits irresistible. Time is not on the Silver short seller’s side. There is no way to determine when the silver shorts will spook and try to cover sales, but, at some point, they must try to buy back and cover the silver they can’t possibly deliver. All we need to concern ourselves with is the critical and long-term physical deficit in silver. Since we can’t determine the “when”, focus on the inevitability of a delivery crunch.

If you are thinking of taking a position in Gold or Silver, contact one of our friendly experts who can answer your questions and make sure you enter the Gold or Silver market correctly.

Shannon King

Senior Staff Writer –

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