Nickels Make Dollars The Rude Awakening
Chicago, Illinois
Thursday, December 28, 2006
Eric Fry, reporting from Laguna Beach, California… "Après le déjeuner, allons voir le sapin de Noël au Rockefeller Center." "Très bien. Mais je voudrais également aller au Bergdorf Goodman pour acheter une écharpe de cachemire…" If you don't understand these phrases, don't bother visiting New York City. French appears to be the new official language of New York…or at least the new official language of Manhattan above 57th Street. On a recent visit to Manhattan, French words and phrases seemed to fill the air…even during those moments when your editor was not loitering outside the Alliance Francaise or perusing the insanely pricey menu at Ducasse or conversing directly with his French-speaking friend. Whether strolling through Central Park, searching for a piece of pizza along Amsterdam Avenue, or dining at Petaluma on the Upper East Side, French-speakers continuously crossed our path. Perhaps we should credit New York City's many virtues for causing this new French invasion. But we suspect we should, instead, credit the feeble dollar. One euro buys 50% more dollars than it did five years ago. Which means that euro-toting French tourists can purchase 50% more of whatever they desire than they could five years ago. In 2006 alone, the U.S. dollar shed about 10% of its value against the euro. But the dollar's value is tumbling even more rapidly against tangible real-world assets like wheat and gold and crude oil and nickel. Today, for example, one U.S. dollar buys 44% less wheat, 55% less gold, 67% less crude oil and 83% less nickel than it could buy at the beginning of 2001. In fact, the value of the U.S. currency has dropped so precipitously against nickel and copper, that the metallic content of a U.S. nickel is worth much more than nickel…as Mike Shedlock explains below. ------ The Objective Investor ------- REVEALED: The 7 Deadly Sins that Sabotage Investing Success… Trusting your future to funds and the blue chips? You may be playing to lose. Read all about it here… -------------------------------------- Nickels Make Dollars
by Mike "Mish" Shedlock
"People who melt pennies or nickels to profit from the jump in metals prices could face jail time and pay thousands of dollars in fines, according to new rules out Thursday," USA Today reported last week.
"Soaring metals prices mean that the value of the metal in pennies and nickels exceeds the face value of the coins. Based on current metals prices, the value of the metal in a nickel is now 6.99 cents, while the penny's metal is worth 1.12 cents, according to the U.S. Mint… "'The nation needs its coinage for commerce,' U.S. Mint director Ed Moy said in a statement. 'We don't want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers'… "Under the new rules, it is illegal to melt pennies and nickels," USA Today explained. "It is also illegal to export the coins for melting. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the USA or ship $100 of the coins abroad 'for legitimate coinage and numismatic purposes.'" 
Note the irony that the mint would be concerned about those who would "take advantage of the American taxpayer," when the actual production cost for each penny is now up to 1.73 cents, according to the Houston Chronicle. Year in and year out, The U.S. Mint wastes taxpayer money by coining pennies. Notice that the Mint produced $78,612,000 worth of pennies at a cost of $135,998,760, thereby wasting $57,386,760 of taxpayer money through November 2006. The all-in cost of coining pennies is even higher, after you include the wasted time and money that merchants and banks spend sorting and counting the damn things. Following is a recent e-mail conversation I had with John Rubino at Dollarcollapse.com… Mish: Oddly enough, it is quite likely that the Mint will bring upon itself the very conditions it hopes to prevent! Telling people that 20 nickels are worth 40% more than a dollar can only invite hoarding. Rubin Exactly! I told my 9-year-old about the nickel thing today and he immediately got our change jars out and started picking out the nickels. The Mint had to be crazy to announce that a nickel is worth 7 cents. I got to thinking about this a bit more, and a nickel is really 0.05 dollars plus a call option on the price of copper and nickel (the metals) in the nickel. If that option is deep "in the money," the mint cannot prevent people from hoarding them, which will in turn drive up the cost of producing them. In fact, the mere expectation that metal prices will climb could cause hoarding. Of course, the Mint tried to negate that "call option" feature by making it illegal to melt the coins, but that will not stop hoarding if the expected or actual price of copper and nickel gets high enough. All the Mint really accomplished was telling everyone that a nickel is backed up by something useful, even if a dollar is not. Eventually, this fact is likely to force the mint to debase the nickel by replacing its copper and nickel content with steel or aluminum. Recall that the Mint long ago replaced much of the nickel in nickels with copper, just as it removed the silver in silver dollars and replaced the copper in pennies with zinc. In the short term, it is likely the value of a nickel drops to a nickel or less because of the falling price of copper. Many faithful readers know that I have been bearish on copper for quite some time. I have been bearish on copper simply because so much of it is used in housing. And as expected, the copper price has been slumping in step with the housing market. (Interestingly, lumber prices have been sliding sharply). Exactly what are Dr. Copper and Lumber telling us? To me, it is obvious. This economy is in trouble. The slumping prices of copper and lumber indicate that economic growth is screeching to a halt. I expect the copper price to continue sliding from the current price of $2.65 a pound to the $2.20 level…and a drop to $1.60-$1.80 is not out of the question. Let's now return to my previous question: "In what time frame will the current (and probably soon-to-be confiscated) nickel be worth more than a dollar?" Aaron Krowne gave a couple of possible answers to that question on AutoDogmatic.com: "If base metal values continue to increase by 5% per year on average, and the dollar continues to depreciate by about the same, then in about 26 1/2 years, a nickel's [metal content] will be worth a dollar…"
Some might think Aaron is asking too much, others too little, and in the short term, I am still calling for a pullback in copper prices. But what's to lose by hoarding nickels? Oddly enough, hoarding nickels is a hedge against both hyperinflation and deflation. If hyperinflation kicks in, a nickel might be worth more than a quarter (in metal content) in no time flat. If deflation kicks in as I suspect, cash will be a good thing to have. If you are going to hold cash (change), it may as well be in nickels. Editor's Note: Michael Shedlock (Mish) worked in the financial services industry for 20 years at some of the top institutions in the country including Harris Bank, the Bank of Montreal, Bank One, First National Bank of Chicago, and First Data Corp. He is a regular contributor to the free e-letter, Whiskey and Gunpowder, which covers resources, oil, geopolitics, military history, geology and personal freedom. To get your free subscription, click below: Whiskey and Gunpowder ------ A CEO's Salary ------- A CEO Bets 22% of His Modest Salary That His Company's Stock Will Rise At Least 74% in the Next 11 Months His CFO agreed, and invested 31% of her salary…a scant 2 hours later. Fact is-this $300 million company has just seen the largest insider-buying surge in its 48-year history. If the CEO and the CFO, among other top execs, have this kind of confidence-shouldn't you get a cut of the coming profits too? | 
