The Future Worth of a Nickel

The Daily Reckoning PRESENTS: Right now, a nickel is the closest thing to ‘honest money’ we have. We are in the ironic situation where the value of the dollar is falling, but the value of a nickel is rising. Whiskey & Gunpowder’s Mike Shedlock wonders, in what time frame will the current (and probably soon-to-be confiscated) nickel be worth more than a dollar?

THE FUTURE WORTH OF A NICKLE

“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,” reported USA Today 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. 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 in the mint for being 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 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. Worse yet are the continued handling charges (and time wasted) by merchants and banks sorting and counting the damn things.

Following is an e-mail conversation I had with John Rubino at Dollarcollapse.com shortly after I wrote “Pennies, Nickels, and Dollars”:

Mish: Oddly enough, it is quite likely that The Mint will bring upon the very conditions it hopes to prevent! Telling people 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 (he’s home from school with a cold) 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 ITM (in the money) enough, the mint cannot prevent people from hoarding them, which will in turn drive up the cost of producing them. In fact, the actual price does not even have to get high enough; the mere expectation that metal prices will get high enough could cause hoarding. Of course, the Mint tried to negate that call option 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 is likely to force the mint to debase the nickel by replacing the copper and nickel in the nickel 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. That is actually the process I was referring to when I suggested nickels would soon be confiscated.

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. If there were as much nickel in nickels as there used to be, then nickels would be worth even more than today’s copper nickels.

Many of you 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. I expected that symmetrical triangle to break down, and it did. Also note that I was lenient in how I redrew that triangle. The lighter blue line at the base was the lower edge of the previous triangle I was looking at.

We have since then seen a retest of support at the 320 level that seems to have failed, as well as multiple failed tests of the triangle (using previous lines). My target remains the 220 level, but 160-180 is not out of the question. Technically, copper is broken. Can it blast higher anyway? Yes, it can. I just do not think it is likely.

Exactly what are Dr. Copper and Lumber telling us? To me, it is obvious. This economy is in trouble.

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 26½ years, a nickel will be worth a dollar in inherent value. If the rates are 10% per year, then in a bit over 13 years, this milestone will be reached.”

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.

Regards,

Mike Shedlock ~ “Mish”

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. Mish is currently doing economic and investment research for a number of clients. In addition, Mish runs one of the more popular stock boards on the Motley Fool, Investment Analysis Clubs/Mishedlo and one of the more popular boards on Silicon Investor as well, Mish’s Global Economic Trend Analysis.

He is a regular contributor to the free e-letter, Whiskey and Gunpowder, which covers resources, oil, geopolitics, military history, geology and personal freedom.

We’ll keep today’s missive brief and succinct, dear reader. We realize everyone’s attention span runs a little shorter than usual this time of year.

We did stumble upon some interesting tidbits this morning, though…

“The United States is heading into its worst foreclosure crisis in modern history,” comes the report from the Center of Responsible Lending.

The report, titled, “Losing Ground: Foreclosures in the Subprime Market” looks at the subprime mortgages from 1998 to the first six months of 2006. According to the CRL, “more than two million predominantly minority and low-income Americans with subprime mortgages expected to lose well over $100 billion in homeownership wealth.”

Hmmm…we hate to say it, but we aren’t a bit surprised. What did the lenders think was going to happen when they convinced every pizza boy, 7-11 employee and Wal-Mart greeter to take out an adjustable rate mortgage? Eventually rates would rise to the point that these subprime borrowers simply can’t afford to make their payments.

Luckily, it seems as though prospective homeowners are wising up a bit. This morning, the Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Dec. 15 fell 10.2 percent to 647.6, from 721.2 a week earlier.

Hopefully this means that people are catching on…if you don’t have enough money to make your mortgage payments…if you have to get real “creative” with your financing – buying a house is not the best idea…

Now, for more news…

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Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis:

“European central bank president Trichet gave the euro some support today while addressing the European Parliament’s economic committee in Brussels. Trichet said the economy of the dozed euro nations remains at risk of accelerating inflation…”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

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More views…

*** “Among cynics, HL Mencken (1880-1956) holds pride of place in my opinion. In his judgment, democracy is the art and science of running the circus from the monkey cage,” said economist Atanu Dey in the Indian blog were referring to in yesterday’s issue.

“A handful of members of parliament (MP) were caught taking bribes in a sting operation by a website called Cobrapost. Report of politicians taking bribes is as astonishingly novel as the news that bears do potty in the woods, or that Michael Jackson is weird. They are a seriously depraved lot (the politicians, not the bears) and it would appear that that level of depravity is not just mandatory but required. In India, real politicians are thugs and crooks. Those who are not are mere amateurs who don’t belong among the professionals. So Cobraposts revelations that MPs have accepted bribes to ask questions in the parliament is not news, merely detail.

“What really astonishes is the reaction of the MPs to being caught red-handed… It takes a peculiar sort of brazenness to then claim that the media is at fault and is responsible for diminishing the stature of the House. And the action to be taken? Why, bar reporters from the Central Hall of the Parliament! That is what one MP recommended. And I suppose if we totally ban the reporting of any crimes committed by politicians in the country, the country will truly prosper.

“In the [United States], I had heard of cases of perverted justice. For instance, a burglar while burgling, fell through the sky-light and hurt himself and then successfully sued the building owner for negligence…The stuff of urban legends.

“But to actually read about something as perverse in the newspapers totally baffles me. Which planet do these monkeys come from? I had heard that the Parliament was a circus, but I did not realize that it is also a loony bin. Have these people no shame?

“Some time ago, I had proposed public flogging as a mechanism designed to fix some of the problems that plague India. That needs rethinking because public flogging may be too good for some of these critters.”

*** And a reader complains that we didn’t give Indian wine a fair test:

“According to Kapil Grover, director of the Bangalore-based Grover Vineyards, exports are on an upswing for the last few years – especially to Europe – including France, the motherland of wines.

“Grover Vineyards, which has been exporting 240,000-300,00 bottles a year, is expecting a 15% rise in its overseas sales this year.

“Though all the three major wine manufacturers in India – Champagne Indage, Sula and Grover Vineyards – have been in the world market with their premium brands for quite some time, the recent rating of Grover Vineyards’ premier red wine, La Reserve, as one of the top-ranking brands in the world market by the Decanter magazine has really put India in one of the top slots in the global soft liquor market.

“Grover’s La Reserve, was rated the ‘best new world red’ compared to five major global brands from France, Germany, New Zealand and Spain, and has been recognized as a very good-quality wine consisting of 80% Cabernet Sauvignon and 20% Syrah grapes. The wine is grown in the Nandi Hills outside Bangalore by the world’s prestigious wine magazine.

“After computer software and pharmaceutical services, it is now the turn of the Indian wine industry to pitch for a sizeable global share.”