Reading time: 8 – 14 minutes
United States legal tender nickels present an almost completely risk-free investment. Getting a large 5 gallon bucket and tossing in the nickels from your daily change is an excellent way to preserve your purchasing power, protect your wealth and reduce both counter-party and payment risk. But due to increasingly despotic threats and actions by the United States government this avenue for wealth preservation is being threatened.
PURCHASING POWER
The current melt value of 1946-2009 nickels is about $0.0465604 or 93.12% of the face value. A great resource to track the current melt rates of United States legal tender money relative to Federal Reserve Note legal tender currency is Coinflation.com.
Each nickel is 5.00 grams and consists of 75% copper and 25% nickel. Thus, a $10 box of nickels, or 200 nickels, weighs 1,000 grams or about 2.2 pounds. This would be about the size of two bricks. With some gold spray paint and the unverified shortage of LBMA quality bullion you may even be able to get the problematic GLD ETF to buy a few bars.
COUNTER-PARTY RISK
Nickels are usually available for withdrawal from your local bank. Since so many banks are failing and so many others are in worsening financial shape it makes since to keep minimal cash balances in your account(s) unless you know of their financial soundness. The FDIC’s reserve fund is in horrible shape but the $500B line of credit with the Treasury should keep formal bank runs with lines, like Disney Land used to have, at a minimum.
But a physical nickel in your hand has intrinsic value and can never become worthless which makes it immune to payment risk. By taking possession instead of keeping the electronic digits in your bank account you completely eliminate that degree of counter-party risk. Additionally, you pay no fabrication fees unlike purchasing gold, silver or platinum.
MISH’S MISSTATEMENTS OF FACT
Mike Shedlock of Global Economic Analysis in an article titled Analysis: Ridiculous Hype Over Secret Oil Meetings wrote:
Ten Simple Facts
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
While I will not address the substantive analysis of his article I would like to address several misstatements of fact and offer analysis on potential likely changes to the landscape.
CURRENCY CONTROLS
First, as stated in #5 the ability to ‘sell any currency they want and buy any other currency’. Foreign exchange controls are various overt forms of controls imposed by a government on the purchase or sale of foreign currencies. These controls can take many forms including, (1) banning the use of foreign currency within a country, (2) banning locals from possessing foreign currency, (3) restricting currency exchange to government-approved exchangers, (4) fixed exchange rates or (5) restrictions on the amount of currency that may be imported or exported. Section 14 of the International Monetary Fund agreement provides for currency controls for transitional economies.
While Mish may attempt to narrow the discussion from ‘any currency and any commodity’ to any major currency or the currencies of major economies I think doing so fails on both counts as China imposes overt foreign exchange controls, had a 2007 GDP of $3.5T, began to sell sovereign bonds to foreigners in September 2009 and is a formidable force in the global economy. Therefore, to categorically state that anyone can sell or buy any currency or commodity through the extremely liquid FOREX markets is a blatant misstatement of fact. But this surface analysis is even more potent if one keeps digging.
Second, I am unsure what Mish means by ‘Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.’ Drawing upon Dr. Vieira’s previous work I address the issue of what is a dollar as applied to the recent Kahre case. An excellent book on the subject is Murray Rothbard’s What Has Government Done To Our Money. The actionable conclusion for IRS purposes is to distinguish between FRN dollars and U.S. Dollars as found under 31 U.S.C. 5112. This difference leads to a capital gains tax on gold or silver, which are both commodities and currencies.
Interestingly, Section 408(m), applicable to retirement accounts, provides exceptions for legal tender gold and silver coins along with ‘a coin issued under the laws of any State’. The IRS also issued a private letter ruling that ‘The acquisition by an IRA of shares in trusts which hold gold and silver bullion as their only asset will not constitute the acquisition of a collectible under Code Sec. 408(m).’
If a capital gain tax rate greater than 25% is not a draconian currency control in practice then I am not sure what is. Because both FRN$, gold, silver, copper and nickel are legal tender thus in practice this capital gains tax is perhaps the single largest protection of the FRN$’s fiat currency monopoly which leads to its market dominance and world reserve status. Yes, all Dollars are dollars but some Dollars are more equal than others.
Third, as I analyzed in June 2009 the United States Treasury issued additional overt currency controls on United States legal tender in 2006. The announcement provided:
The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.
“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to seeour 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.”
Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.
The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.
In conclusion, the assertions in Mish’s “Ten Simple Facts” of substantive statements of fact are actually complete misstatements.
For example, if an individual wants to withdraw a mere $10 of legal tender nickels, or 2.2 pounds, from their bank account and melt the coins down to create a doorstop then they face a fine of $10,000 and imprisonment of not more than five years. If they sufficiently resist then the costumed criminal gang will escalate the unjustified aggressive violence and inflict death. It would be nice to live in the fantasy world Mish describes where ‘Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.’ but that is simply not the case.
Additionally, I have not addressed other enacted or pending legislation in both the America and the Eurozone that lays a strong foundation for additional currency controls to be implemented.
CONCLUSION
Nickels are made copper and nickel which are tangible assets that have intrinsic value. They are an excellent vehicle for protecting and preserving one’s purchasing power. Nickels are approaching the point where, like gold, silver and copper coins, their face value will be less than their melt value. But in anticipation of and to impede the free flow of capital the United States has imposed overt foreign exchange controls on nickels and pennies with draconian penalties.
Disclosures: Long physical gold, silver, platinum and some nickels with no position in the problematic GLD or SLV ETFs.
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{ 6 comments… read them below or add one }
Trace, re ‘nickel’, the same argument might be made for copper pennies dated 1981 and prior. ’82 was the year the pennies were debased from .95 copper/.05 zinc to ..025 copper /.975 zinc. There were actually 7 different varieties that year, some .95 copper, some .025 copper. Sets of same sell at a nice premium on eBay.
I have argued with my ‘survivalist’ friends that the older .95 coppers will serve in the same capacity as ‘junk silver’ coins will – small change if you will:-). In support of this position, consider that the ‘copper pennies’ sold on eBay pre-meltdown for over twice face value. Copper was over 4 bucks then, but I have a feeling we shall see these days return – God save the Republic.
As I speak, mint bags of pre-1982s are selling for $150 minimum!!! Even those that are ‘opened’ fetch over 100 bucks. Circulated coppers are being withdrawn from circulation as we speak by penny freaks. It takes a while to sort, but with a small digital gram scale, it can go pretty fast. The gross coin weights are quite a bit different. This would be a fantastic lesson in Gresham’s Law for the kids (of any age).
Broke-er in Boise:-(
“Sometimes it is better to appear a fool than to open one’s mouth and remove all doubt”
The idiots who publish Mish’s writings as fact have been proven successfully and repeatedly that misinformation is alive and well.
Just as the Founders expected the fathers of their respective families to bear arms to protect their families, they also expected men to seek the truth !
Too many men have abdicated their responsibilities to their government and so here we are today.
I was fortunate to meet Chris Simcox (minutemen founder and Congressional Candidate), James T Harris,(dynamic talk show host of Wisconsin)J.D. Hayworth ( former congressman and on house ways and means committee) and Judge Andrew Napolitano at the Tucson Tea party Sat 10/10/09.
Thank You, Trace for doing an extraodinary job of keeping us informed and fighting the war to return our Republic to us with your pen.
It is mighty indeed !
Jay
Time for a “nickel” substitute. The thought raises the question, “why is this an issue?” My third grade son solved the problem by suggesting that if we run out of nickels than we can use the plastic 5 cent pieces used in his toy cash register. He showed me the colorful little tokens which are much more attractive than the 5 cent piece we have come to know as the “nickel”. I reminded him that at some point in the future that there may be more than 5 cents worth of plastic in his new 5 cent piece. Johnny did not think long before coming up with the idea of using recycled cardboard. I think my son may have a future as a FED board governer! ES Rath, Oldsmar, FL
Trace,
regarding the convertibility of Dollars which Mish emphasizes, the point missed by most (including Mish) discussing this issue is more subtle. The fact that oil can be bought for Dollars only means that everybody is forced to hold Dollars in order to pay the oil bill. If this requirement is not there, there is no incentive to hold Dollars which means that the Dollar price would go down. Surely, the FX market will always trade Dollars. However, the price at which Dollars will clear depends on the overall market demand for Dollars. If all essential commodities can be bought without Dollars, then there is little reason to hold Dollars, hence the demand for Dollars goes down.
To sum up, the FX exchange value of the Dollar depends on the desire of the market to hold Dollars. That desire is influenced positively if an important commodity like oil can be bought for Dollars only.
More raising of great issues! Yes, there are many issues and an analysis of all of them in Mish’s article would spill a lot of ink which is why I wrote “While I will not address the substantive analysis of his article I would like to address several misstatements of fact and offer analysis on potential likely changes to the landscape.” I was merely addressing the currency controls currently in effect where Mish had stated there were none.
But I agree that most people only talk about the supply of money and its effect on price and rarely there is an analysis of the demand for money. And obviously, everything else being equal, if the demand for money declines then the price will also decline. But the assertion that ‘Surely, the FX market will always trade Dollars.’ is incorrect because fiat currency has no intrinsic value and FRN$ will one day become worthless and therefore no longer trade on the FX market. Surely, this will happen but it may take a long time. Also, currently oil can be bought with more than just FRN$.
Trace, good article as always. Nickel does offer the opportunities you describe, to preserve purchasing power by stockpiling metals commodities (coins) which have intrinsic worth. Nickel will rise in the face excessive liquidity creation resulting in FRN debasement. Copper represents an even better opportunity. When eventually the melt ban is lifted on these coins, or cheaper substances substituted, you’ll be glad you saved them. For more on these subjects visit realcent.forumco.com to find a community of like-minded individuals who share their ideas on related matters. Regards, Ray Long coppermillions.blogspot.com