Jim Cramer and London Financial Times Now Touting Physical Silver

 |  Includes: CEF, GTU, PHYS, PSLV, SGOL, SIVR
by: Golden Economizer

Last week I wrote four articles for Seeking Alpha which proposed four different retirement portfolios for the next three years. All four were based around a core investment of silver, and I recommended to hold it in the form of physical silver investment coins and bars.

But knowing that most people would not seriously consider going through the inconvenience of acquiring and storing physical silver metal, and the tax penalties of liquidating their retirement accounts, I included precious metal ETF’s in all four portfolios as a substitute for owning physical silver and gold. And not just any physical precious metals ETF’s. I purposely did not choose the two largest, most famous ETF’s, GLD and SLV. This is for a number of reasons. One reason was that I wanted to choose funds that held the bars of metal outside of the U.S., but mainly because the custodians that store the physical metal for these two funds are the notorious bullion banks, HSBC (HBC) and JP Morgan Chase (NYSE:JPM). These banks are well known to have maintained gigantic, short positions in gold and silver over a period of years, and cannot, in my opinion, be trusted to safeguard the secure storage of precious metals that they will desperately be needing themselves to cover their own short positions as the continual massive, money printing by the Federal Reserve drives the price of gold and silver into the stratosphere. And this money printing is guaranteed to continue, since the U.S. Congress irresponsibly insists on living beyond its means.

In 2001, the Congressional Budget Office was projecting $5 trillion in budget surpluses over the coming decade. Kind of makes you lose faith in the accuracy of their forecasts.

Both the CBO, and the White House predict trillion dollar budget deficits for the next 10 years, while the Democrats and Republicans sit in Congress arguing over whether to cut $30 billion or $60 billion from this year’s budget, and the Tea Party is demanding that they fulfill the promise to cut $100 billion. This will barely make a dent in the problem. And both the CBO and the White House have consistently underestimated the size of budget deficits. On March 6, 2010 the CBO upped their estimate of the 2011 deficit from $1.0 trillion and $1.3 trillion.

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The CBO now estimates that if all of Obama’s budgetary proposals are enacted, then the 2011 budget deficit will be $1.43 trillion.

But the CBO admits that if the current spending rate continues for just 7 more months, the 2011 budget shortfall will be $1.54 trillion. Of course, the unfunded liabilities of Social Security, Medicare and Medicaid add another $3.5 trillion each year, so even addressing the $1.5 trillion current account shortfall would be an exercise in make believe accounting.

And while Congress debates whether or not to raise the debt ceiling, a look at the actual numbers on March 30, 2011 shows that we have already exceeded it. Kind of makes whether it will be raised a moot point, they should now be discussing how high to raise it! And it illustrates my point that the reckless, continued, future expansion of the money supply can be taken for granted.

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What we see here is a Federal Reserve chart of the Monetary Base ((M0)) of the United States from 1918, shortly after it was founded, to the present day. The monetary base is the narrowest measure of money supply provided by the Fed, containing only currency and coins in circulation and bank vaults, and member bank deposits held by the Federal Reserve. It is interesting to note that after remaining flat for many years, what appears as a only slight rise of currency in circulation in the late 1960’s was enough to force the U.S. Treasury to halt the redemption of U.S. dollars for gold in August 1971, in violation of the Bretton Woods Accords of 1944. By that time there were already $198 of paper currency in circulation for each ounce of gold held by the Treasury, which had been hemorrhaging bullion to France and Switzerland for at least three years. Currently there are $3812 dollars in circulation every U.S. government owned ounce, and that’s if all the gold is still safely in Fort Knox, as claimed. (Yes, I know that it is in several different depositories). It hasn’t really been audited since 1953, even though the law requires an audit every 10 years.

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The monetary base curve really starts steepening in the early 1980’s, when the Reagan administration decided to cut taxes and run bigger budget deficits. And where you see it go vertical at the end is during the last four months of the GW Bush administration, and continuing into the Obama years.

Think that silver overpriced today at $37 an ounce? Well, if you take the blowoff top price in January 1980 of about $48.50 an ounce, and deflate it using the CPI as a gauge of inflation, then the equivalent price today would be about $135.

This next chart is from a brilliant article by Mark J. Lundeen, and shows the price of silver in constant 1920 dollars, but indexed for inflation using U.S. currency in circulation rather than a flawed metric such as CPI.

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The blue curve shows silver in constant 1920 dollars, and the red curve shows the US currency in circulation. The surprising result is that silver today is priced at only $0.16 in constant, inflation adjusted 1920 dollars, even though it was selling for $1.32 in 1920! To reach its equivalent 1920 price of $1.32 an ounce today, it would have to be priced at $296 an ounce. And unlike 1920, there is a serious shortage of physical silver inventories available for sale today, but that is enough subject material for another article.

And that is one reason why I recommend putting a great portion of your retirement portfolio into physical gold and silver bullion held in your own possession. There is really no other safe alternative. But if you want to take a much greater risk, and still participate in the continuing precious metals bull market, in the knowledge that silver, in particular, is greatly underpriced in today’s dollars, then physical bullion ETF’s such as SIVR (ETFS Physical Silver Shares), PSLV (Sprott Physical Silver Trust ET), PHYS (Sprott Physical Gold Trust ETV), SGOL (ETFS Physical Swiss Gold Shares), CEF (Central Fund of Canada), and GTU (Central Gold Trust of Canada) are far better alternatives than GLD (SPDR Gold Trust) and SLV (iShares Silver Trust).

The following excerpt is from a London Financial Times article published on March 29, 2011, about how physical silver is rapidly gaining favor with American investors, leading to shortages of investment coins and bars.

These days, however, customers mainly have eyes for one product: the silver American Eagle.

"Silver’s hot. People want it. People don’t want to have money in the bank," says Eric Streiner, the shop’s manager. Buyers include everyone from "business executives to lunatics," he adds.

The same story is being repeated across the U.S. Silver has become the favoured investment of disaffected Americans. The recent wave of disenchantment with the economic stewardship of the country’s institutions – from the government and the Federal Reserve to big Wall Street banks – has sent demand skyrocketing.

Nowhere is the unbridled enthusiasm for silver clearer than at the level of coins and small bars – the type of product most accessible to smaller investors. All the world’s top mints are selling silver coins at record pace: the U.S. Mint has sold 12.4m ounces of silver American Eagles in the first three months of the year – equivalent to about 6 per cent of quarterly global mine output.

David Madge, head of bullion sales at the Royal Canadian Mint, says sales of silver Maple Leaf coins "remain robust with demand still exceeding our supply."

The level of demand means dealers are sold out of popular products. "Anything you can get right now you can sell," says Michael Kramer, president of Manfra, Tordella & Brookes, a New York-based coin dealership. "If I want to, I can sell my [weekly] allocation in five minutes."

The level of demand for products such as 100 ounce bars and silver American Eagles has caused premiums – the cost of particular products over and above the value of the metal they contain – to jump to the highest levels since 2008, dealers said.

Even Jim Cramer is jumping on the silver bandwagon now, a decade late, but better late than never. Now, I’m not saying that Jim Cramer is a reliable source of investment information. Many use him as a contrarian indicator. Cramer is on record recommending to buy stocks that were about to declare bankruptcy, and in a February 9, 2009 story, Barrons reported that betting against Cramer's Buy recommendations using options in the short term could yield 25% in the initial month.

Suspicious as I am of Cramer’s motives and past history, he is performing a public service by correctly recommending to buy silver at this time, when virtually no one else in the main stream media is even addressing silver as an investment opportunity, good or bad, although most investors would certainly have their interest piqued if they were even aware of the 600% gain that silver has returned over the past decade.

Quoting Jim Cramer:

"there is a fabulous article in the Financial Times about the actual demand for physical silver, I know because I’ve bought some physical silver, you have to pay a very big premium, and I think that anyone who wants to bet against the precious metals has to just go and buy some gold or silver, especially silver, ‘cause you’ll recognize that you go into your gold dealer or your silver dealer, silver in particular, and the price that you hear about in the market is meaningless versus what people are willing to pay. So you can only imagine, if you’re a silver miner like Silver Wheaton (NYSE:SLW) how much money you can really make ... until you see retail demand go down, I continue to be very pro silver."

Disclosure: Long physical precious metals