Why Silver's History May Be Due for a Repeat

Today's comment is by Michael Checkan, a long-time member of our Council of Experts. Michael is President of Asset Strategies International, Inc. (ASI) and specializes in helping North Americans diversify assets internationally using the precious metals and foreign currency markets.

Dear A-Letter Reader,

It's said, "Those who do not study history are doomed to repeat it."

I say, "Those who study history profit when it repeats."

As an avid reader, I have studied my share of history. And, after four decades in the precious metals industry, I have lived through my fair share of history as well.

Our Run-in with Silverfinger

I met my partner, Glen O. Kirsch, while we worked for Deak-Perera many years ago. As precious metals brokers, we often purchased futures contracts for precious metals and had them delivered directly from the exchange.

We would hire Brinks to pick up the metals from the COMEX warehouse. The driver would then transport the gold, silver or other metals where we needed them.

One December day in 1979, our Brinks driver called Glen to say he was stuck in traffic. He was attempting to deliver a tractor trailer load of silver to the Bank of Delaware on Deak-Perera's behalf.

Unfortunately, our driver was stuck behind a long line of tractor trailers which were all trying to offload metals at the Bank of Delaware. He told Glen that he wasn't going to be able to offload today. They simply could not get to him.

Glen called his contact at the bank, Rose, to get things moving. In the course of the conversation, Rose let it slip that our driver was stuck behind an extremely large delivery of silver belonging to Nelson Bunker Hunt - the famous oil executive who was later convicted for trying to corner the silver market.

This was just one of many deliveries "Silverfinger" had taken off the exchanges.

In fact, Bunker Hunt's buying began with a 20,000,000 ounce December 1973 contract. He was buying a good seven years before silver would reach all-time highs near US$50 per ounce.

Fast Forward to 1997...

Skip ahead two decades, and suddenly another prominent billionaire, Warren Buffet, was buying silver. In total, Buffet bought 130,000,000 ounces of silver in the late '90s. Learning from history, he chose to transport his silver from the COMEX warehouses and send it outside the U.S. - to the United Kingdom. That was 10 years ago.

Nelson Bunker Hunt's Spike in Silver Prices - in 1980 - Seven Years After He Bought

If you compare this chart with the one below, you can clearly see that Bunker Hunt (1973) and Warren Buffet (1997) have something in common. They were both able to spot a fundamental bull market in silver well ahead of the pack.

Warren Buffet's Spike in Silver Prices - in 2005 -
Eight Years after He Bought

Did Everyone Except Buffet and Hunt
Miss the Precious Metals Party?

So the question is: Did we all miss our chance to invest in precious metals? Should we have invested seven or eight years before prices spiked - like Hunt and Buffet did?

Actually, I would say "no." You haven't missed your chance yet. I'm still incredibly bullish on metals. In fact, I've been beating the drum for precious metals since the late '90s.

I've also invested in silver (and gold), and I have been encouraging my friends, clients and readers to do the same. That's because I believe we're just seeing a glimpse of the huge precious metals profits to come in the future.

You see, there are a host of similarities between Bunker Hunt's silver bull market in the 1970's and 1980's, and our silver bull market happening right now.

What Do These Silver Ages Have in Common?

Both eras featured strong supply and demand fundamentals. In both cases, limited above-ground supplies, ever-increasing demand and the rising exploration and mining costs affected the silver market and drove prices up.

In both cases, geopolitical tensions have created safe haven flows of capital to tangible assets. In 1980, it was the Iranian hostage crisis. Today, the threat comes from global terrorism and the war in Iraq.

But, the similarities don't stop there...

The biggest specter hanging over this economy is, at the same time, the major potential driver of higher prices - inflation.

Inflation is what really sent prices soaring to the heavens in 1979. I believe inflation is what will eventually drive our prices even higher today. Sure, we're all feeling the sting of inflation at the gas pumps right now. But this is only the beginning - inflation could get significantly worse in the coming quarters. Specifically two recent developments have begun to wake this sleeping giant.

Sub-prime Crisis = Bad Inflation,
Bad Inflation = Higher Silver

We can thank a myriad of leveraged bad loans and derivatives trades for this sub-prime mess. As you know by now, the first shock waves of this cash crisis hit in mid-August. More carnage is certain to occur as credit tightens...even for good loan risks.

The solution for governments worldwide is to introduce more money into the economy. Governments around the world have already poured billions worth of emergency funds into their economies to stave off a credit crisis. These governments are creating paper currencies out of thin air.

These emergency dollars stream into the economy. But you won't see a noticeable increase in goods and services for these dollars to chase. So you will eventually see the prices of these finite goods and services increase as well. The price will inflate as more and more dollars vie for the same products.

Why Black Gold Also Impacts Inflation - and Silver

The oil embargos of the early 70's led to a substantial increase in fuel prices. Today, oil is within spitting distance of US$100 per barrel. It's hard to believe that oil was below US$20 per barrel just seven years ago.

Crude oil prices have literally gone up 400% since then. This will undoubtedly result in considerably higher fuel prices. That doesn't just affect your transportation - it affects how much companies must pay to transport their goods. And, virtually every product that makes its way to market via a gas-powered vehicle will feel the effects.

Rather than spending more on shipment costs and cutting their profit margins, companies will just pass those costs onto their consumers by increasing their prices (i.e. inflation).

Like any other product, silver is going to cost more to mine and produce - because of higher fuel and shipment costs. Thus, silver companies will increase their prices to pay for the gas to transport their silver.

When it comes to measuring silver, we do so in dollar terms. The dollar is our measuring stick.

Imagine someone continually cutting off chunks of your measuring stick every time you try to measure something. Yet, they still called your new, shorter stick a "whole measuring stick." Eventually, you'll need more than one "whole measuring stick" to determine an item's length. You will have effectively "devalued" your measuring stick.

Price inflation has the exact same impact on the dollar, which is our measuring stick for silver. As the dollar loses "chunks" of its value, it will take more dollars to purchase silver. When that happens, silver will shoot up once again.

Keep Your Measuring Stick Intact

To preserve purchasing power, you must stop letting others clip chunks off the end of your measuring stick. Take your dollars and place them into precious metals. By holding tangible silver (and gold), you have fixed the length of, and effectively protected, your measuring stick.

History is repeating itself. We know how this story ends. If you see this scenario as I do, you can take action to protect yourself and profit from it. If not, you will most certainly be doomed to repeat history.

MICHAEL CHECKAN, President
Asset Strategies International, Inc. (ASI)
800-831-0007 or 301-881-8600
assetsi@assetstrategies.com
www.assetstrategies.com

EDITOR'S NOTE: From 1979 to 1980, we saw a 13% increase in the cost of goods as indicated by the Consumer Price Index (CPI). That's 13% in one year! This time around, we expect the inflationary pressures to dwarf that number. This week, we'll reveal several ideas that can help you fight inflation from on-the-scene in The Bahamas at our Offshore Advantage Academy. Tune in tomorrow for our first special "Bahamas edition" of the A-Letter.

The Halloween Massacre - One Year Later - Part II

As I said on Friday, the Canadian government dropped a bomb on the trust unit industry this time last year. With one stroke of a pen, the Canadian government suddenly changed the trust unit rules - and wiped out US$19 million in market capitalization.

Today we call this assault on the trust unit industry the "Halloween Massacre."

Canada is actually similar to Bolivia, Venezuela, Kazakhstan or Russia when it comes to the great 21st century commodity tax-grab.

More mineral-rich countries are turning the tables (and contracts) on foreign drillers and mining companies to boost their riches. With the base metals, gold, platinum and oil at either record highs or multi-decade highs, governments are re-writing the rules on direct foreign investment. And there's nothing investors can do about it.

Adding further insult to injury, the Alberta government recently announced a 20% increase in provincial royalty taxes - another nail on the energy trust coffin. But I believe the market will absorb the latest Albertan tax grab because oil prices trade north of $90 a barrel and soon, probably over $100 per barrel.

The major difference is Canada offers far greater political stability than most oil-producing nations. Canada is also a friendly and reliable source of natural gas and tar sands crude for the United States.

So this is the way it works for investors in commodities markets...

When commodity prices are distressed (1983-2000), governments encourage direct foreign investment to boost resource production combined with hefty tax incentives. The foreign multinationals, lured by big tax breaks and cheap labor, gamble on low prices hoping supply and demand fundamentals will change one day.

They're reluctant to grow production because of the low prices. But they remain in Venezuela or Russia, for example, because mineral wealth is vast.

Then a bull market is born again (2001 to present). Suddenly, prices skyrocket. Host governments want a bigger slice of the resource pie. Eventually, these governments mandate tax increases and revenue-sharing deals to international investors. And if you don't like their terms, too bad - get out.

Over the last few years, we've seen many governments, including Canada, change the rules on how natural resources are taxed. World governments could target all the big headline commodities like crude oil, gas, base metals and even gold, if they fear a full-blown monetary crisis.

Can governments confiscate gold? Yup, FDR did it during the Great Depression.

ERIC ROSEMAN, Investment Director

P.S. If you're planning on investing in gold - the time is now. Click here for some of my favorite plays to tap into this gold bull market.

Privacy & Rights

Who's Trying to Break Your Code?

When Julius Caesar sent messages to his generals, he feared these secret war messages might fall into the wrong hands. So he coded his messages to avoid compromising his war plans. He used a simple code that shifted each letter three positions to the right. For instance, he replaced every M with P, every B with E, etc.

Today, codes have become much more sophisticated, but the objectives are the same as in Caesar's time. You want to send a message to someone that only that person can read. Or, shifting back to our own time, you want to make messages (or other files) on your PC that no one can ready except for yourself.

A mathematical process called "encryption" makes this possible. Encryption scrambles your messages or files using mathematical formulas, which are designed to make text unreadable to anyone except for someone possessing the key to "decrypt" it.

Encryption programs exist that can create messages which even the NSA's supercomputers can't decipher, at least not without an exhaustive effort. They're easy to use, and cheap - sometimes even free. I highly recommend them.

In keys, longer is better. The way a key is generated influences its strength. But in general, the more "bits" a key has, the stronger it is.

For instance, I use an encryption program called "Pretty Good Privacy" (PGP). One of the types of keys PGP uses is called an "RSA key." A 4096-bit RSA key is stronger than a 1024-bit RSA key.

And it's not just a little stronger. Key strength increases exponentially with key length.

Unfortunately, the early versions of PGP support a maximum key length of 1024 bits. Recent research indicates that in near future, powerful computers will be able to crack 1024-bit RSA keys. However, 4096-bit RSA keys are still very safe - for now.

If you're using 1024-bit keys to secure your email or computer files, you should upgrade to a longer key. The newest version of PGP, PGP Desktop, supports the stronger 4096-bit keys. So does the free version of PGP you can download at www.pgpi.com.

But act soon. They asked one researcher whether 1024-bit RSA keys are dead or not. This cryptographic researcher, who is racing to crack them said, "The answer to that question is an unqualified yes."

MARK NESTMANN, Privacy Expert & President
The Nestmann Group
www.nestmann.com