Last week's final three days witnessed silver break free from its long restraining shackles. The precious metal rose a combined thirty-three cents and ended the week at $5.41. This was its highest closing level since February, 2000. This earlier event occurred in the aftermath of the explosive price advance that was engendered by information leaked to the marketplace, that Warren Buffet had accumulated tens of millions of ounces of silver. The high point of that rally occurred when silver touched $7.50 per ounce. Now, it appears that the white metal has finally completed its consolidation, and is poised to probe its destined higher levels as its Bull Market enters its next stage of advancement.

I remember when silver was tied to the dollar. Silver was pegged by the U.S. government at $1.29 an ounce at that time. During that period, prior to 1965, Silver Certificates could be redeemed by our citizens for a similar dollar amount of silver. Further, the U.S. government had an enormous 3 billion ounces stockpile of the white metal. During the late 1950's and into the early 1960's, the demand for silver sharply increased. Much of the metal was consumed by the government. It was used to produce our coinage that was desperately needed to keep our economy moving smoothly. Business had been expanding for a number of years and required an increasing amount of new minor coinage production to satisfy it.

Prior to 1965, silver was used to produce our dime, quarter and half dollar coins. In 1964, the U.S. Mint in Philadelphia was overwhelmed by the public. They queued up waiting to exchange their silver certificates for silver coinage. Also, rare coin dealers offered as much as $1.50 per dollar of silver certificates for anyone who cared to accommodate them. The dealers then brought their acquired certificates to the mint and redeemed them for silver coin and later for various other forms of silver. This was a profitable undertaking because silver had rocketed in price on the open market to a point that it far exceeded its government mandated price. This first rush into silver was the result of a shortage. It was created by a combination of a great increase in demand for the metal as well as by the government's decades long ceiling on silver, which inhibited silver exploration and production.

In 1964, the price rise caused by the enormous silver requirements of our government and industry, forced our officials to remove silver from our coinage. Thus, from 1965 to the present, the 90% silver content of our earlier silver coins was replaced by a combination of copper and nickel. Our half dollar saw its silver composition reduced to 40% for the years 1965 through 1970. However, by 1970, silver's price had risen sufficiently high so that even the token amount of silver remaining in the Kennedy half dollars was replaced by the similar copper-nickel content that was used in our circulating dimes and quarters.

Another interesting event occurred by late 1964. All of our circulating silver coinage rapidly met the fate of Gresham's Law. This economic truth states that bad money drives out good money. The public realized that the silver in the pre-1964 coinage was worth far more than the face value of the coins themselves, the good money, and began to hoard them. The coins were quickly withdrawn from circulation and after 1967, seldom were silver coins found in circulation. They had all been replaced by their look alike copper-nickel substitutes; the bad money.

Even the U.S. government did not overlook the profitability of recovering the silver from our earlier coinage. A few years ago the Superintendent of the Mint during that era recalled installing separating machines at the various mint facilities. They removed whatever silver coins was missed by the public and melted them. Thus, tens of millions of our earlier circulating coins met their fate in various melting pots across the nation. They were destroyed and forever lost, to recover their far more valuable silver content.

To give newcomers to the silver market some perspective and bring them up to date, I believe that a brief historical review is important. By 1978, silver had broken through the $5.00 level, after the supply/demand deficit had acted to gradually drive up its price. The annual supply shortfall had been in effect for nearly a decade, and there was no end to it in sight. In fact, in order to satisfy the demand, or some say to suppress its price rise, the government undertook periodic sales of silver from their massive stockpile. Eventually, the government had sold all but a few hundred million ounces of the precious metal, which they needed to satisfy our military requirements.

By 1979, not only had the silver deficit worsened, but inflation had already begun to rear its head. Silver moved to $7.00 an ounce early in the year, to $10.00 by the summer, and hit an inter-day high of $52.50 in January, 1980. This occurred when gold peaked at $875 an ounce, inflation had risen above10% annually, and the entire commodity complex had exploded in price.

Late in the silver Bull Market, the Hunt brothers of Texas attempted to corner the silver market. To this end they were instrumental in the final, incredible price spike that took silver to its ultimate peak. However, as I recall, despite the entrance of the Hunts, silver had already surpassed the $10.00 level and was moving higher in tandem with gold. Silver's supply deficit had already become a driving force and moved it explosively higher in price. The Hunt brothers astutely recognized that condition and positioned themselves accordingly. I am bringing this to the reader's attention to point out that a precedence has been set. The white metal has already traded above $50.00 an ounce, and that was over 20 years ago. Remember, silver only recently surpassed $5.00 an ounce. The first time was 30 years ago!

After silver's 1980, $52.50 high, it entered a secular Bear Market that existed until its nadir in 1991. During the 1991 through 1993 era, silver touched the $3.50-$3.55 area on several occasions. In retrospect, given the above history, this represented an incredible buying opportunity. And, given yesterday's break-out above an earlier major area of resistance, I believe that silver's upside price potential now safely exceeds it downside risk.

Yesterday, for the first time since early 2000, silver finally vaulted above the high $5.30 zone. It was repelled from this area on two occasions. As long-term subscribers know I turned strongly bullish on silver in April, 2002. At that time I recommended "taking a significant position in silver." Since then I have become increasingly more confident in that belief. Now, I feel that silver is on the cusp of fulfilling if not exceeding my ultimate price expectations.

The reasons for owning silver at this juncture are as compelling as those that surrounded gold when I turned bullish on the yellow metal. This occurred after it rose from its 2001 low at $255 into the $270 area. At that time I viewed gold ownership as offering as limited risk for an investor as one could hope. I now view silver in a similar light.

Silver has been in a supply/demand deficit for over a dozen years. It's annual shortfall has been in the neighborhood of 100 million or more ounces during this period. This has been satisfied by the dwindling above ground supplies. As I stated in my July, 2002 issue of Financial Insights, "the past few years have found the silver market essentially scraping the bottom of the barrel; there is little known remaining above ground silver to satisfy the supply deficit. If conditions do not change, it is likely that within three years the entire known above ground silver stock will be consumed. When that occurs prices will skyrocket." I went on to state that " Given the incredibly tight supply picture for silver and the enormous short position overhanging the market it is likely that we will not have to wait until the above ground silver stocks are consumed. If silver rises in its Bull Market it will pressure those who are short the metal. Like gold, I anticipate some spectacular silver short squeezes to occur during the next few years."

Silver's short position is the greatest of any commodity. This phantom supply has acted to retard any important price advance for the past several years. The reason that it has grown to such lofty levels is that it helped satisfy investor demand. Further, the physical market has become increasingly tight.
As you can see, the conditions surrounding the silver market are surprisingly similar to those that existed during the 1970's. However, today they are far more favorable for the silver investor.

The government is now a net purchaser of silver rather than its major supplier, when it sold in the vicinity of 3 billion ounces of silver into the market. This acted to temporarily suppress its price advance. It has not only exhausted its silver supply but has been forced to enter the marketplace as a silver buyer. The U.S. Mint must compete with other silver users in order to acquire the needed supply for the coining of their Silver Eagles, as well as for their coinage to satisfy collector demands. Further, a short position has been built up that will unwind like a coiled spring as the market moves higher and the shorts run for cover and reverse their positions. Not only has the supply/demand deficit been as great and as long-lasting as during the earlier period, but the available silver supply has now been virtually depleted with scant likelihood of increasing for the foreseeable future. Remember, nearly 75% of the world's silver supply results as a byproduct of copper, lead and zinc production, and these are not likely to shortly rise.

To me, silver's break-out above the important $5.38 level bodes well for sharply higher prices. All that I need are two further consecutive trading session closes above this point to solidify this belief. The next price target is $6.00 which stopped it in its tracks in1999. After that milestone is reached, which could occur quite soon, the $7.50 high that resulted after investors learned of Warren Buffet's silver purchases is the next important area of resistance.

I believe that the words that I penned about silver in July, 2002, are today even more credible. Further, since that time the world community has depleted an additional 150 million or so ounces of silver from the available above ground supplies.

Not to be unexpected, silver's price advance will be accompanied by sharp reversals! In fact, silver may continue to work in its present range as the short interests muster whatever strength possible in their fight for their financial lives. Given the incredible amount of the precious metal that they short, the likelihood of a massive short-squeeze can occur at any time. When that moment arrives those who possess the white metal, or the shares of the few silver producing or silver stockpiled companies, will be amazed at how quickly profits will accumulate.

The above was excerpted from the December 2003 issue of Financial Insights © November 16, 2003.

Dr Richard Appel
Financial Insights
November 20, 2003

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.

Please visit my website where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.

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. © 2003 by Dr. Richard S. Appel. All rights are reserved. Parts of this newsletter may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.