Why the Smart Money is Trading Dollar Bills for Hard Assets

“With each passing day,” we observed last week, “inflation seems less and less a theoretical fiction, and more and more a genuine threat… No self-respecting economist or self-aggrandizing central banker is acknowledging any inflationary risk whatsoever,” we continued. “But the indifferent data points of real-world prices testify to the contrary.”

Shortly after airing these remarks we learned that import prices soared 1.2% during the month of December alone – lifting the year-over-year surge in import prices to 4.7%. The following day we learned that producer prices jumped 3.8% year-over-year. A few days after that, the Federal Reserve Bank of Philadelphia announced that producer prices in the Philadelphia region had jumped to their highest levels since July 2008.

These data points do not prove that an inflationary threat is stirring, but they do offer compelling testimony. Meanwhile, commodity prices are providing ample corroborating evidence. During the past eight months, the Reuters/Jefferies CRB Index of commodity prices has soared 32% – far outpacing the stock market over that timeframe. The grain complex, in particular, has been on a tear, as the prices of both wheat and corn have nearly doubled since last summer

These eye-popping gains may be exceptional, but they are hardly unique. All but one of the 19 commodities in the CRB Index has advanced during the last two years.

All the smart folks on CNBC are calling this a bubble. The rest of us are calling it a bull market. The smart folks say, “Sell commodities, especially gold.” The rest of us keep buying the stuff because we can’t think of anything better to do…and can’t think of any better way to protect ourselves from the toxic inflationary plume that is spewing from Ben Bernanke’s Marvelous Money Machine.

The longer Ben’s machine churns out dollar bills, the greater the imperative to trade dollar bills for hard assets…or nickels.

Yes, it’s true; the value of a nickel is soaring, even as the value of a dollar is slumping. That’s because every nickel that rolls out of the US Mint contains about 3.75 grams of copper and about 1.25 grams of nickel. Current metallic value: 6.8 cents per nickel.

The Metal Content of a US Nickel

We present this illustration merely to underscore the obvious: A small piece of imprinted paper contains less real-world value than a small piece of copper and nickel.

Furthermore, as your editor pointed out in an ancient edition of The Rude Awakening, “a US dollar is a poor conductor of electricity and combusts near an open flame. It contains no measurable quantity of any element on the Periodic Table, nor any resource whatsoever that could contribute to any industrial application. Rather, a dollar contains little more than a politician’s IOU.”

The nation that issues both dollars and nickels is the same nation that spends more than it earns, that imports more than it exports and that relies upon massive foreign borrowing to sustain its bizarre breed of prosperity.

If current trends continue, a nickel might soon buy more than a dollar.

Eric Fry
for The Daily Reckoning