Beware of a Rule Change for Silver

Dr Richard S. Appel
March 26, 2004

Silver recently broke above the important $6.00 level that should have at a minimum presented some important resistance. The impressive sustained buying frenzy that fired its advance quickly not only catapulted it quickly through that point, but has now placed it in a position to attack far higher price levels. When I began working on this essay several days ago I thought that it would at least require a month or longer to attain the $7.50 price objective. This was the height to which silver earlier soared when Warren Buffet announced that he had purchased a substantial amount of the white metal in early 1998. Now that $7.50 has been surmounted, and barring a correction which should normally attend such an event, the next area of important resistance should be $8.00 followed by my intermediate price target of $10.00. Given the abruptness of silver's current breathtaking advance, it is likely that we will not have long to wait before these targets are approached.

One issue that greatly impresses me is the effect of a recent unified letter campaign to various government officials. These outlined the abuses that have allegedly influenced the free trading silver market. It is believed that a group of bullion banks, brokerage firms and commercial interests have acted for years to suppress the price of silver. Ted Butler who has long championed silver initiated the campaign. He was responsible for the outpouring of thousands of individual letters to important officials such as Elliot Spitzer, New York's Attorney General. Mr. Butler's coaxing, along with that of the Gold Anti-Trust Action Committee (GATA.org) was instrumental in a flurry of letters that appear to have forced the authorities to at minimum look into these allegations. It is amazing that shortly after the campaign was initiated, silver appeared to become freed from the shackles that had prevented its price appreciation for a number of years. The timing was that precise.

If the allegations are true, which I believe is likely, those who have worked to maintain silver at an artificially low price will now be forced to stand aside and allow the market to set its own course. They will do this for fear of government sanctions against their indefensible actions. To me this is truly a great win for "the little guy", the man in the street, all of us! Further, it proves that a number of people working together in search for truth and justice can actually make a difference! My hat is off to Ted Butler and GATA.

It is amazing how powerful the Internet can be if utilized properly. In this instance the availability of instantaneous communications allowed a vast number of individuals from varying countries and from very different walks of life, to successfully connect for a like-minded goal.

If indeed silver has broken away from the restraints that have impeded its advance for the past several years, it is now free to quickly make up for lost time. This will allow it to rise to the $8.00 area, which appears to me to be the white metal's present minimum equilibrium level. However, there are other considerations that must be taken into account in order to determine the extent of silver's remaining thrust if the suppressing forces have indeed been quieted.

I have been long waiting for the build up of silver's fundamentals to propel it sharply higher. Silver has been in a supply deficit for nearly 15 years. During this time the vast majority of available above ground supplies have been consumed.. Further, the various government stockpiles have been all but exhausted. During the early 1970's, the U.S. government maintained a silver inventory of about 3 billion ounces. This has long since been depleted. The U.S. now finds itself in a position where it must compete in the marketplace to acquire needed silver supplies for the production of their various silver collector coins.

The enormous commodity short position against silver has been at an unsustainable level for quite some time. It appeared obvious that the shorts would eventually be forced to cover their positions. Further, given the amount of silver that they owed, a massive short squeeze seemed the likely outcome. The only question has always been one of timing! Now, we appear to be at the thresh-hold of the silver shorts long-awaited day of reckoning.

Given the fact that the above events appear to be coming to a head, the ultimate outcome will be a significant spike in the silver price. This will be needed to attract the sale of a sufficient quantity of silver from the "strong hands", in order to clear the market. I believe that this process has now been set into motion! When the smoke settles, the only question is the needed dollar price that will effect the balance of the white metal's supply and demand.

Given the above, I believe that within the foreseeable future we will be faced with a silver price well in excess of $10.00 an ounce. It is impossible to presently predict whether silver will rocket to $12.00, $15.00, or even $20.00 an ounce because there are too many unknowns. Further, the enormous short position has not been built up by an unwitting public. It has been undertaken by bullion banks, important brokerage firms as well as major commercial interests. In effect, by some of the most powerful, financially sound and shrewdest minds in the financial world. They will not easily go down fighting! There will likely be sharp corrections as negative information regarding silver enters the market. However, in the end, I believe that a year from now we will all look back at today's silver price and wish we had owned more!
By now you see that I have not yet addressed the title of this discussion. I recognize this, but I wanted to first lay some groundwork and give you my perception of the condition and future of the silver market. However, before I properly address my topic, I believe that a recap of history is also important.

During the silver blow-off period which occurred between August, 1979 and January, 1980, silver exploded in price from about $9.00 to $52.50 an ounce. This was the time when the famous Hunt brothers achieved a corner on the silver market. They effectively controlled the majority of the world's available above ground silver supplies. Earlier, they had cautiously and secretively acquired an enormous cache of the white metal. Once having attained their goal they began to bid up silver's price.

Silver had already begun a secular Bull Market prior to the initiation of the Hunt brothers short squeeze. It had been trading in the $4.00 to $5.00 range for a few years prior to its break-out above the $5.00 resistance level in early 1978. It then worked its way higher into the summer of 1979. During the incredible short squeeze that ensued the white metal experienced bouts of multi-up-limit days. When the shorts finally panicked in December, 1979, silver was trading at about $18.00. Subsequently, the white metal moved limit-up for a number of consecutive days. When silver approached $50.00 an ounce most of the shorts were already bankrupt on paper. They were locked in and were unable to extricate themselves from their positions as silver rose day after day without trading.

From various rumors that I read at the time, some of the major shorts were allegedly either officials or had close ties with members of the Commodities Futures Trading Commission (CFTC). If this was true these individuals had the power to change the rules that governed silver futures trading in the United States. When silver vaulted above $50.00 an ounce, the CFTC announced that only liquidating orders would be allowed to be executed on the Exchange.

This forced the longs to sell as the shorts neither desired to cover their positions nor had the capacity to do so. Thus, within a day or so, silver began to collapse in price and went limit down day after day until the first shorts began to cover their positions and bought back the silver that they owed. As I recall, this did not occur until silver had returned to the mid-$30 range. When this happened numerous longs, who had earlier pegged the market correctly and had sizeable profits, were decimated because they had no opportunity to exit their trades until silver was trading about fifteen dollars lower.

I am submitting this information so that those interested in the fate of silver will also have an understanding of the past. I am not presenting this to frighten you but to prepare you for the possible replay of an earlier, real event. Further, I do not believe that we will face such an occurrence in the near term! I say this because it will likely transpire during the latter stages of silver's Bull Market, which I do not foresee for quite some time. However, if silver ultimately achieves a substantial price target that I believe is likely in store for it, many powerful individuals and companies who are short the metal will be severely damaged. And, some of them may be in a position to effect changes in order to extricate themselves from their mistakes.

If this occurs, I hope that readers will not suffer a similar fate as did those who were right about silver at $52.50 an ounce in 1980, but severely suffered due to a damaging rule change. Instead, I hope that you carefully monitor all of your silver related investments and do not expose yourself as did those who were financially destroyed at the whim of those who may have benefited from their destruction. My advise to both benefit from the emerging great silver Bull Market and not expose yourself to the potential of damaging regulation changes, is to buy silver, but buy the physical! I am confident that if you choose this course of action, at the end of the day you will have both slept well and will have prospered.

The above was excerpted from the April 2004 issue of Financial Insights © March 21, 2004.

Dr Richard Appel
Financial Insights

I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.

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CAVEAT

I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! However, if this troubles you please avoid those that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all specula-tions! Never invest any money in these stocks that you could not afford to lose all of.

Please call the companies regularly. They are controlling your investments.

FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company's actual results of operations. © 2004 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.
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