London Trader - "Potential for Major Short Covering in Gold and Silver"

With gold hitting new all-time highs and silver hovering around $40, a trader out of London told King World News today, "The all important thing to watch is the pit close (Comex). If we get a pit close today in the US above either $1,600 gold or $40 silver, then you are going to see some huge capitulation by the shorts. $40 silver is the trigger, there is a significant amount of money which did not want to enter the silver market until it cleared $40."

"So you essentially have two critical factors to watch if we get a strong close today in silver. A close today above $40 leaves those stops highly vulnerable to getting tripped (they will cover their shorts). In the meantime you are also going to get funds who have been out of the silver market popping back in once it closes above $40. These two competing buyers could create a quick and somewhat violent short-term move to the upside.

Right now silver is looking very bullish because the open interest is so small. It appears there is a lot more room on the upside for silver vs gold because of the current structure, but I am not saying gold is anywhere near the top.

A close above $1,600 on gold, similar to silver closing over $40, would create a huge bunch of short-covering. The commercials have been adding short positions in gold, but should we get a close above $1,600, I think you will find the smaller of those shorts are going to start covering their shorts because it's going to be too much pain. This could result in a $50 move overnight.

There is plenty of physical demand, no one is letting up....

"but there has been a slight reduction in demand out of Asia as the price of gold has been rising recently. There have been a few discounts going on since gold pierced $1,580 (US), but nothing significant. However, silver demand out of Asia has been staying extremely strong.

Don't forget we have option expiration in gold taking place in eight working days. There are about 2.3 million ounces of short bets sitting at $1,600 and currently there are only about 1.5 million ounces in registered inventory. If these call holders in options, and there are still about 24,000 of them as of Friday, if even a chunk of those stand for delivery you will see some real fireworks to the upside.

You can expect war at that point because that's too big a bet by a couple of small entities, and even though they will shoot themselves in the foot on a short-term basis, they will not be able to come up with the metal without driving the price of gold through the roof. So I would say expect a bit of a war at the $1,600 level as we hit option expiration and shortly thereafter.

So prices could explode to the upside and I think silver could easily jump up $2 or $3 from here in the blink of an eye. Again, if we get a close above $40, that kind of short-covering, plus new investment, we could get $2 or $3 to the upside easily in one session. I would add that this would also cause additional pain for anyone on the wrong side of that trade."