PM miner shorts squeeze is coming.

Gold stocks are seasonal (first graph). And the Summer months are not kind to their price action. What is developing now is something else. In an interview on KWN, Sinclair and Norcini forecast a coming consolidation among junior gold miners and an enormous shorts squeeze. Let's look at the facts and see why these experts make these predictions.

Gold has been going up steadily and the weekly chart of gold gives us two parallel lines for the 50 DMA and the 200 DMA(second graph). During the same time, gold miner stocks have been going down (see the graph for HUI-the AMAX index). Sinclair and Norcini point to the hedge funds shorting these stocks as the cause of this.

The drop in gold miner prices has two consequences: 1. they have become very cheap considering what they have in the ground and 2. once consolidation begins, it will set off a rapid shorts squeeze. The impetus for the consolidation is the desire of senior miners to acquire gold that can be mined for many years to come.

There are a number of junior miners that fall into this category. THM is one with 14M ounces of gold in the ground and 92M shares. The king of the juniors is NAK. It is located in Alaska, has about 100M ounces of gold and 55 billion pounds of copper and a fair amount of tungsten. Anglo-Gold Ashanti owns one half of the proposed mine and is committed to financing the development and permitting process to the tune of $1.5 Billion. NAK has roughly 100 million shares outstanding. If we multiply the ounces of gold by the gold price and divide by the number of shares, we get a number that represents the value of a share of stock. For NAK, this is (100M oz x $1,500/oz)/100M shares, or $1,500/share. That's just the value of the gold they have and at current prices. So, a share of NAK is worth roughly the price of an ounce of gold in American Dollars. The last figure shows what has happened to shares of NAK. So, NAK is valued 150 times of its current price/share even if gold went no higher.

Sinclair and Norcini remarked that eventually value wins out. The coming shorts squeeze will be awesome. When and what will set off the process? The two experts remarked that the final factor that sets off the run is usually something that you do not guess ahead of time. My guess is late July or early August.