Nickels, Copper, Lumber

This post is a continuation of Pennies, Nickels, and Dollars with an additional look at copper and lumber. For those who missed it here is a brief recap:

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.

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 Chronical. Year in and year out the mint wastes money by coining pennies.

2006 Coin Production Figures
Click on chart for a better view.



The above chart thanks to the US Mint.

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 of 2006. Worse yet are the continued handling charges (and time wasted) by merchants and banks sorting and counting the damn things.

Click on the above link if you wish to calculate how much the mint wasted in 2004 and 2005 coining pennies.

Following is an email 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 they hope to prevent! Telling people 20 nickels are worth 40% more than a dollar can only invite hoarding.

Rubino:
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 .05 dollars plus a call option on the price of copper and nickel (the metals) in the nickel. If that option is ITM enough (in the money) the mint can not 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.

I concluded Pennies, Nickels, and Dollars with the following:

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. In what time frame will the current (and probably soon to be confiscated) nickel be worth more than a dollar?

Copper

Recall that the mint long ago replaced much of the nickel in nickels with copper, just as they 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 was as much nickel in nickels as there used to be, then nickels would be worth even more than today's copper nickels.

If you are still with me, here is a weekly chart of copper (now the primary value in holding nickels).



Click on the above chart for a better view.

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.

Lumber

For grins here is a chart of lumber prices.



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

The Future Worth of a Nickel

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 and a half 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 metals 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.

This post originally appeared in WhiskeyAndGunpowder.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/