How to Profit from the Upcoming Short Squeeze in Silver by Jason Hamlin from the "Gold Stock Bull" website.

3/22/09 Clarification on Gold/Silver Ratio: In 1792, the gold/silver ratio was fixed by law in the United States at 1:15, which meant that one troy ounce of gold would buy 15 ounces of silver; a ratio of 1:15.5 was enacted in France in 1803. The average gold/silver ratio during the 20th century, however, was 1:47. The ratio dipped below 1:20 during the last major spike in precious metals in 1979. Thank you to Cliff in Perth for pointing this out as my saying “Historically, the ratio averages closer to 15″ could have been misleading.

Silver chat rooms are ablaze with talk of a short squeeze that will send the price of silver back above $20 in short order. I believe it is only a matter of time and not so much a question of if, but when it will occur. The price of silver is far below fundamental supply/demand would dictate and there are plenty of signs of manipulation taking place. But whether you agree with the manipulation argument or not, it is easy to see that the current gold/silver ratio is way out of whack at 72. Historically, the ratio averages closer to 15 and even further from the current ratio is the production ratio around 9 and the geological ratio around 7.

What does it all mean? One reasonable assumption would be that the silver price has some catching up to do in order to return to its equilibrium or more natural price relationship to gold. Using the most conservative of estimates, the price of silver should be fetching around $60 per ounce! Even if you believe the price of gold is overvalued and should be closer to $750, that still gives us a silver price of $50. Any way that you look at it, silver is way undervalued versus gold.

These abnormalities are typically caused by some form of artificial interference and always have a way of working their way out and returning to levels dictated by free market economic forces. From the current price of $12.71, silver would enjoy a 372% price increase to reach $60. While this sounds a bit far-fetched, it could happen more rapidly than you can imagine. Paper short positions in silver (up to 800 million ounces) are several times larger than all of the annual physical investor demand for silver (50-100 million ounces). And the majority of these paper shorts are held by only a few investment banks, with JP Morgan being the principal culprit. So, if investors start to demand delivery and paper shorts scramble to cover, $60 silver is suddenly not such a far-fetched theory

Another bullish indicator for silver is the current backwardation that has been running for nearly 40 days. That means that the price for immediate delivery has been consistently higher than the price for future delivery. Gold and silver occasionally slip into backwardation, but rarely for this long. Two articles referenced in the following paragraphs provide more information on backwardation and why it is bullish for precious metal prices.

So we have an extremely out of whack gold/silver ratio, paper short positions that cannot be sustained or delivered upon and backwardation running for nearly 40 days in a row. The manipulators are simply holding down a spring and the more hands (paper promises) that join in attempting to hold down the spring, the stronger the reaction will be when they are finally overwhelmed. It creates the potential for a truly explosive move in silver that will provide little warning and little time to jump onboard. You need to be positioned before the spring pops or kettle explodes as the volatile nature of the silver market will not provide a gradual ride that you can simply jump aboard at your leisure.

James Turk reports on the extraordinary amount of stress in the silver market, saying:.

No one is stepping in to sell physical silver in exchange for future delivery, so there is only one possible conclusion. There is not sufficient physical silver available at current prices to meet demand. So unless the shorts can somehow come up with the physical silver they need to meet their obligations to deliver and thereby relieve the backwardation, the price of silver needs to climb higher. It needs to rise high enough to induce holders of physical silver to sell their metal, which the shorts need to buy to meet their obligations to deliver.

Ted Butler, who I had the opportunity to hear speak recently, also wrote an article a few days ago suggesting that it was crunch time for silver.

Allow me to summarize what all these micro and macro signs of wholesale shortage mean to silver investors. Quite simply, it means that the price of silver should explode soon. If the short-term signs I see, both micro and macro, are true representations of what is occurring with supply and demand, then it may be crunch time in silver. If that’s the case, buckle up and get ready for the ride of your life.