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(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

This is the time when it's customary to record the past year's events and attempt to look into what the New Year holds. I'll spare you the typical overview, and concentrate on what I think was important in the silver market. These are things you won’t read elsewhere. That's because my list will focus on the silver manipulation and whether it is ending, whereas the word "manipulation" is not even uttered in polite research circles. For the record, I think 2003 was a watershed year for silver.

The silver manipulation is the key to future silver prices. Let me fast-forward to the end of 2003, when the silver price rallied more than $1 per ounce, to post a full year return of around 25%. After lagging gold's performance for most of the year (as well as just about every other base and precious metal), silver caught up to, and exceeded gold's 2003 return of roughly 20%. That is not important, in and of itself, as silver still remains grossly undervalued compared to gold. What is important is why silver jumped at the end of year and into the new year. I think it's just the start of a very long price journey. After all, the price jump was not anywhere near what I have been projecting, although it was certainly in the right direction. If I'm correct, 2004 promises to be historic for silver.

My biggest highlight for 2003 was the opportunity to ask publicly and frequently the question, "how can silver even be considered to be in a free market, given the facts of a documented deficit with shockingly depleted inventories with no sharp increase in price?" This violates every known tenet of basic economics and the law of supply and demand. I asked that question of the regulators at the CFTC, the NYMEX/COMEX, and publicly at every opportunity. There was never a legitimate, free-market explanation ever offered. There never will be. I think it is highly possible that the regulators and major market participants finally understand this simple question is clear proof of manipulation in the silver market. That proof undermines the silver manipulation. That's good news.

A second highlight was the confirmation that Red China was the silver supplier of last resort. While it remains unclear just what China's motivation is in its involvement in the silver manipulation, we can rule out any legitimate, free market reason, aside from gross stupidity. In a very real sense, the silver manipulation has been a manipulation of the silver deficit or shortage. Those managing the shortage, by making sure there is just enough silver to meet daily world needs, are the manipulators, clear and simple.

Another highlight was my allegation that China could be working with one or more of the Silver Managers, the small group of powerful NY financial firms who dominate the silver market in "wolf pack" manner. There's no way that China is pulling this off by itself. That I publicly and privately alerted these firms to wrongdoing of the most serious nature, and received a mild protest or no protest speaks volumes.

Another highlight was the unexpected non-renewal of the employment contract of Neal Wolkoff, the chief operating officer of the NYMEX/COMEX, its highest-ranking non-elected official. Mr. Wolkoff had been the chief COMEX public defender against my allegations of manipulation, and we debated those allegations openly and frequently. While I don’t rejoice his departure from the COMEX, after 20+ years, the timing of the press release, Oct. 1, announcing that departure, suggests a change in thinking at the COMEX, in my opinion. That date is important because it comes so soon after the most important silver highlight of 2003.

By far, the most important highlight of the year was the spontaneous and grassroots Internet petition to New York Attorney General Eliot Spitzer, concerning the silver manipulation and the likelihood of a delivery default on the COMEX. The petition was created by Russell Townsend, and was based upon my letter to Mr. Spitzer of September 15. As of today, there are more than 2100 names and numerous comments on that petition site, which beseeches Mr. Spitzer to intercede to ensure integrity and fairness to the COMEX silver market. If you have not taken the time to review the sincere comments recorded there, please do so: http://www.petitiononline.com/comex/petition.html

This petition is a very important document. The number of names and the quality of the comments are remarkable. In my opinion, this document has already made a big difference in the silver market, and will continue to do so in the future. I think the importance of this document has been overlooked by most market participants. I say that because of the reputation of the man it was addressed to, Attorney General Spitzer. Because of his possible scrutiny, I am convinced that there will be no default in the COMEX silver delivery process.

I had been convinced of the strong probability of a COMEX silver delivery default before I wrote to Eliot Spitzer. In fact, that was why I wrote to him in the first place, as my letter makes clear. But after writing to him, and the creation of the petition, and the public outpouring it produced, as well as the impact it probably had, I am strongly convinced that no default is on the horizon. This removal of the threat of a default is incredibly bullish for the price of silver.

I think the large movement of silver into the COMEX warehouse, starting in October and continuing during November was a direct result of pressure on the COMEX to make sure the large shorts had enough silver to deliver. Let's face it - if COMEX experiences a silver delivery default anytime soon, the New York authorities could be on them like a duck on a June bug. They have the power to put crooks in jail, unlike the CFTC or the self-regulatory apparatus.

If I were depending on the CFTC to insure the integrity of the market, I would not be so confident of no default in COMEX silver. But, in fact, I think the CFTC aided the cause of delivery integrity, albeit unintentionally, when they put their foot in their mouth and wrote that their solution to a silver delivery problem would be to close the COMEX. This was precisely the wrong thing to say, and I think people were floored by their incompetence.

Yes, the petition sent to Mr. Spitzer was the highlight of the year. The price performance of silver seems to verify that. Look at a chart. Look at the dates of the various letters to Mr. Spitzer and the subsequent articles on the depressed price of silver, and the outrageous short position unique to silver. Then look at the price movement. It's clear to me that the possibility of Mr. Spitzer’s involvement discouraged a continuation of the silver manipulation. Nor would he tolerate a delivery default. There's been just too much visibility and advance notice of this problem.

At the risk of stating the obvious, let me tell you why this is incredibly bullish. I am suggesting the possibility that the shorts will feel the wrath of criminal prosecution if they dare default on a COMEX silver delivery. We have a complete mismatch, unique to silver, between the number of short contracts and the amount of silver in the world, and we will certainly have a delivery problem, as long as we remain near current prices. Let me restate that. If we stay at current silver prices, we will have a delivery default and a possible criminal prosecutions of the defaulting shorts. Since we can't change the number of contracts much, and we certainly can't change the amount of silver in the world anytime soon, the only way we don't get a default is if we don't stay at current prices.

We must go much higher in price to avoid a COMEX silver delivery default. We must get to a price where the longs will think twice about taking delivery because there is too much perceived risk due to the high price. At current prices, the risk is too low, and the profit potential is too high to deter anyone from taking delivery. That's the key to this riddle. The market must convince investors not to continue to take delivery on their low-priced silver contracts. The only way the market can do that is by eliminating the low prices and instituting high prices. That's the only way we avert a delivery default in COMEX silver. That's a basic part of the law of supply and demand that has not completely functioned in silver until now.

Things have changed. Probably because of the petition sent to Eliot Spitzer, there will be no default in COMEX silver. Just like there will be no late trading anymore in mutual funds. We are being presented with yet another wake-up call to buy silver. What I am suggesting is that unless we get sharply higher prices, we will get a COMEX silver delivery default, and the shorts responsible could go to jail! If I'm correct in my analysis, they’re not going to let that happen and that's a mighty compelling force to the upside. This is strong medicine. Be sure you have enough silver.