Demand for Silver Coins Jumps 148%; Investors Start Pouring In

As central banks around the world are now net buyers of gold bullion, I’m getting more bullish on silver. (Don’t get me wrong. I love gold, and I am a big believer of gold prices moving higher.) But gold bullion may have become too expensive for small investors to own…and silver could just be that low-priced alternative for investors to protect themselves from coming inflation.

At present, both gold bullion and silver alike are experiencing significant negative sentiment. In the midst of all this and severe pressure from the bears, the demand for silver hasn’t declined; as a matter of fact, the demand for silver is increasing and robust to say the least.

In February 2013, the U.S. Mint reported that it sold almost 3.7 million ounces of silver in coins. In the same period of 2012, it sold 1.49 million ounces of silver. Simple calculation would show that’s an increase of more than 148% in demand for silver coins in one year! (Source: U.S. Mint, last accessed March 5, 2013.)

Looking at the long-term chart of silver below, we see it is still in a bull market:

Chart courtesy of www.StockCharts.com

Technical analysis of the chart above would indicate a significant amount of support available for silver prices at the $28.00-an-ounce level. This level has been tested multiple times, with silver prices bouncing higher on heavy volume each time $28.00 an ounce was hit.

With central banks around the world printing paper money and working overtime to devalue their currencies, even if they stop now, the damage to fiat currency (and the inflation issues we will have to deal with in the future because of too much paper money in circulation) has been done.

Just look at the value of the U.S. dollar. What you could buy in 1913 for $1.00 would now cost you $23.26. This means that one century later, we are paying 2,300% more for what we paid for an item in 1913. (Source: U.S. Bureau of Labor Statistics web site, last accessed March 5, 2013.) Now, with all the new money created in the past five years, just imagine how inflation will play out over the next century. A 2,300% increase could easily turn into a 23,000% increase!

While the bears continue to put pressure on the price of both gold bullion and silver, I believe the prices of both metals are poised to rise as the “cloud of optimism” currently surrounding the market dissipates.

Michael’s Personal Notes

As key stock indices continue to march towards new highs, there’s a wave of trouble brewing among big-cap companies regarding their pension deficits. While the mainstream focuses on a stock market propped up by low interest rates and money printing, few are talking about the big threat to corporate America known as the “pension deficit problem.”

According to Mercer, a pension consultant company, at the end of 2012, pension funds of S&P 500 companies had assets of $1.59 trillion and liabilities of $2.14 trillion—a pension deficit of more than $550 billion. (Source: Mercer, February 5, 2013.)

Some big-cap companies are showing concern and doing something about their pension deficit problems. For example, Ford Motor Company (NYSE/F) expects to spend $5.0 billion in 2013 to decrease its pension deficit—about the same amount Ford spent in 2012 on building plants, buying equipment, and developing new cars. (Source: “Low Rates Force Companies to Pour Cash Into Pensions,” Wall Street Journal February 3, 2013.)

Even with all the measures taken to control its pension deficit, Ford’s pension deficit increased to $18.7 billion at the end of 2012. Chief Financial Officer (CFO) Bob Shanks said, “It has got to be a problem for any large company that has a defined benefit plan.” (Source: Ibid.)

The Dow Chemical Company (NYSE/DOW), one of the big-cap companies on key stock indices, posted a loss of $716 million in the fourth quarter of 2012. The company’s CEO, Andrew Liveris, said the company is facing a “massive pension headwind” due to the change in the discount rate. The company expects that pension costs will go up to $250 million and $300 million this year. (Source: Ibid.)

Unfortunately, these are not the only big-cap companies suffering from pension deficit problems. Other companies like The Boeing Company (NYSE/BA) are deep underwater as well. In 2012, the company poured $1.6 billion into its pension funds. This year, it expects to spend another $1.5 billion. The company’s pension fund has a deficit of 26%.

Boeing’s misery has caused the company to release “core earnings,” which take out pension expenses from the earnings numbers. Boeing CFO, Greg Smith, said, “The continued decline in the pension discount rates, driven by the unprecedented low interest rate environment, has caused significant non-cash increase in our pension expense.” (Source: Ibid.)

While on one hand, the low interest rates and paper money printing caused the stock market to rise, on the other hand, it is causing big-cap companies big problems with their pension deficits. Keep in mind that a pension is an expense to a company. The longer interest rates stay low, the worse off pension funds of big-cap companies are going to be.

Where the Market Stands; Where it’s Headed:

After five years and trillions of dollars of newly created money, the Dow Jones Industrial Average hit a new high this week. The stock market has taken on a life of its own. As the economy deteriorates, the stock market rises. The very companies that are part of major stock indices like the S&P 500 will experience negative earnings growth this quarter—the second quarter this has happened in three quarters—and the market continues to rise. I continue to believe this rally is living on borrowed time.

What He Said:

“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. A dire prediction that came true.