Monday, February 28, 2011

Silverbugs, Why Don't You Buy Nickels Instead? (SLV)

As I have mentioned numerous times on this blog, the silver bubble has taken the price of silver to new heights of overvaluation. Silver is universally perceived as a safe store of value now, even though the price is vastly higher than the mining cost. I believe that if the trend followers sold, the price of silver could crash 80%.

Let's look at a more interesting idea for an inflation hedge: no one should own silver as long as there are still nickels in circulation trading for 70% of their metal content.

As of February 18, 2011, the melt value of a 1946-2011 nickel is $0.0733615, which is 47% more than the face value of the coin! The U.S. nickel is 75% copper and 25% nickel. The metal value of the coin is about 50/50 nickel/copper though, because nickel is worth roughly 3x as much per pound as copper.

In addition to the metal cost, the Mint has to produce and distribute the nickels. During fiscal year 2007, the cost of producing and shipping each nickel was $0.0953. By now, the Mint probably has a negative 50 percent gross margin (or worse) on nickels. Nobody sells anything at a negative 50 percent gross margin for very long.

At some point, the Mint will stop making nickels from the current, valuable blend of copper and nickel metal. They have talked about making nickels with nickel-plated steel discs, which is what Canada does.

When the Mint introduces a new, debased, nickel, the current nickels will be taken out of circulation and horded, just like silver coins are. Gresham's law assures us that no one will spend the valuable nickels. This is the catalyst that will cause the old nickels to start trading at a premium.

Here is how I model a nickel in terms of option value. You have a free put option to sell the nickel as legal tender for face value (exactly what you paid for it). Theoretically, you also have an in-the-money call option to melt the coin and take possession of the metals, although it is currently unlawful to do this.

The nickels idea has already leaked out in the comments section There was an objector who brought up the following "objections".
It's "free", except for the facts that
1) It's very hard (though possible) to do on a large scale
It is pretty hard to own silver on a large scale too.
2) It's illegal to melt down US currency to use for its metal content
Doesn't matter. Think of it like a stock that doesn't pay a dividend right now. Pre-1964 silver coins trade for the spot value of their silver content and no one bothers to melt them down.
3) You lose the opportunity cost of the money as it sits there
Short term interest rates are zero, remember? That is what silverbugs are so worked up about in the first place.
4) Your time and energy to do this are worth zero
Anyone who watches TV or professional sports values his time at zero, anyway, so there are a few hundred million people for whom this should be a no-brainer.
5) Your risk of holding such currency are zero (being robbed/fire burning down the place)
This is no different from silver.
6) Your storage costs are zero (to avoid #5 by holding in a vault somewhere)
Also no different from silver. True, nickels are bulkier but maybe you can pay for that out of your instant 44% return.

You are probably wondering, is Credit Bubble Stocks serious about this? Really buying fifty tons of nickels? Ultimately, this essay is a thought experiment about how nickels are a much more attractive alternative to silver. Finally, I have a counter-proposal for the silverbugs who continually badger me about buying silver.

Here is a cool manifesto: How hard are you working for freedom? Hoarding nickels is right up there. By continuing to mint these nickels, the unthinking, moronic government is selling a dollar for 70 cents. But now we have a chance to take advantage of their stupidity and indifference. And build muscle strength while doing it. And get a laugh every week when you make your trips to the banks. Beats watching TV.

11 comments:

LangoneRedStudyGroup said...

So instead of actually arguing on "Can this make money", you essentially shifted the argument to "this is smarter than buying Silver" - which I don't doubt for a second.

1) It is pretty hard to own silver on a large scale too.

No, it isn't. Per pound, Silver is 136 times more valuable than Copper. A 1000 ounce brick of Silver is worth $34,000. An equivilent amount of copper is $250.

2) Doesn't matter. Think of it like a stock that doesn't pay a dividend right now.

Sure, because Nickel's have to possiblity of increasing their book value and can eventually start popping out baby nickels?

> Pre-1964 silver coins trade for the spot value of their silver content and no one bothers to melt them down. <

Again, because the 35% silver is worth 136x what copper is, it could be worth the trouble.

You said before the melting costs doesn't matter - your wrong about that. With modern nickels, it may eat all your profit - probably not nearly the case with pre-war nickels.

3) You lose the opportunity cost of the money as it sits there -
Short term interest rates are zero, remember? That is what silverbugs are so worked up about in the first place.

This makes the wrong assumption that your only alterative investment is in near term bonds. You're not making 10-15% in all those attractive bonds you laid out earlier.

getyourselfconnected said...

Kid Dynamite had an arbitrage idea along these lines up today. I will stick to the pre-1965 dimes and quarters.

Kid Dynamite said...

Howdy, as GYC said, I wrote about this "trade" today also.

http://kiddynamitesworld.com/if-i-had-a-nickel/

A friend and I were seriously considering doing this a few weeks ago, but I bailed for reasons laid out in my post. The main problem, as I see it, is your analogy "Pre-1964 silver coins trade for the spot value of their silver content and no one bothers to melt them down."

You don't have to melt them down for them to trade at their silver value - you just need SOMEONE to be able to melt them down. The problem with nickels is that no one can do so, not legally at least.

I guess it's kinda like if I had a hermetically sealed Lucite box that you couldn't open but could see through. That box has a $100 bill in it - how much will you pay me for the box? If you think that someone else can open it with a special torch, you might pay me $50 and try to sell it to them for $80. But if you think that no one in the world will be able to open it, it has no intrinsic value at all, despite the $100 inside.

The other problem, of course, is that nickels are massively bulky and heavy compared to silver...

getyourselfconnected said...

The Hunt Brothers silver mess in the early 1980's has made pre-1965 dimes and quarters hard to get as they were melted down then. I have maybe a few (some pics on my site) lying around.

CP said...

So you guys think it is economical to dig up copper and nickel ore deposits to extract the metal, but it wouldn't be worthwhile to smelt 100% pure metal slugs?

CP said...

*melt

LangoneRedStudyGroup said...

CP,

I think the problem with your idea is minimum efficient scale to be practical to make any money.

For you to hypothetically make $100,000 before costs, you need to find roughly $250,000 worth of nickels - 5 million of them, which weighs 55,000 pounds.

After you find and transport them, you have to pay to melt them down and refine it into nickel and copper.

Then, after you melt and refine it, you need to transport it again and sell it to someone. Don't think you're going to get the NYMEX price selling it as scrap.

And yes, everyone involved is process is committing a crime, which may deter your smelter or buyers.

And yes, considering people were still mining and selling copper at $2/pound and lower, it is probably much cheaper to get this out of the ground.

Kid Dynamite said...

To clarify: I definitely think it would be worthwhile to melt the nickels down.

The problem is, it's illegal.

And I definitely think that although it's probably possible for you to get 20mm nickels, if you did so, the government might keep some sort of eye on them/you just to make sure you didn't smelt them.

getyourselfconnected said...

OMFG, some dolt will buy nickels tomorrow!

Metal Hoarder said...

The whole melting argument is a red herring, a theory that doesn't hold up. There's no need to melt, since you can trade bags of coins near spot value anyway. Junk silver coins are traded exactly this way, as are gold bullion coins. Neither requires melting to realize its value as a fungible asset. If a compelling business case for melting them ever emerges then there will be people who do it. Until then they will trade as-is, just like silver and gold coins have done for decades. As soon as the mint quits selling them at a discount they will rise, just as gold and silver did.

Buying nickels now is like buying 1964 coins in 1964. I'm sure the same specious arguments were made then as well.

Personally I'm glad that the disinformation is out there, as it makes it slightly more likely I can complete my stack before the world catches on and they disappear from circulation.

Anonymous said...

hi ho silver!!!