Move over, gold ...

[EZ_E]

 

The Investment U E-Letter

 

#315 - Move Over, Gold...

The Investment U E-Letter

Friday, February 27, 2004

 

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Move Over, Gold...

Here's why it might be time to start burying pennies and nickels in your back yard, too...

By Dr. Steve Sjuggerud

President, Investment U

 

You need to make some room next to the gold buried in your backyard... Room for pennies and nickels...

 

I'm only half joking. Starting this year, pennies and nickels may be worth more for their metal content than for their purchasing power. It's true...

 

The U.S. dollar has been crashing in value in the last two years... so much so that in 2004, the U.S. Mint will likely lose money minting pennies and nickels... This is no joke...

 

In 2003, it cost the U.S. Mint 0.98 cents to make a penny. This used to be an easy profit game for the government... In 2002, it cost 0.88 cents to make a penny. And in 2001, it cost 0.80 cents. But now, in 2004, it is almost assured that the government will lose money minting pennies.

 

The good news: These unfortunate times for the dollar will equate to great times for another investment, an investment that almost no one out there is buying right now.

 

Before I tell you what that investment is, let's look a little deeper into what's going on with the dollar...

 

A Loss on Every Penny and Nickel in 2004

 

The U.S. Mint counts September 30, 2003 as the end of its fiscal year. Since then, the price of copper has risen by 62%. Copper, you may be surprised to learn, is the main ingredient in a nickel.

 

In 2003, it cost the government 3.78 cents to make a nickel. Easy profits right? But the government didn't count on the dollar crashing. If the price of copper, the main ingredient in a nickel, stays the same, it's possible that the cost of could rise by 62% in 2004. Then it'll cost the government over six cents to produce a nickel.

 

The situation is similar with the penny. The main ingredient in pennies is not copper, but zinc. Actually, zinc makes up 97.5% of a penny. Zinc is up nearly 40% since the end of the 2003 fiscal year. So if the cost of producing a penny rises by 40%, it'll cost the government 1.38 cents to make a penny.

 

How can the government get out of this mess? Oh that's an easy one... change the metal content of the coins. I'm sure it's only a matter of time. Maybe next year we'll be spending poker chips instead of pennies. And just think, someday down the road, even those poker chips will have more intrinsic value than a paper dollar.

 

So How Can You Play this Downturn in the Dollar?

 

What can you do? One option is to dig a hole in your backyard next to your gold. And fill it with pennies and nickels - coins that have more metal value than spending value...

 

Another option is to start considering commodities and commodity-related investments. I have been writing about commodity-type investments in these letters for a while now. It's worked out fabulously. As I said in this letter, since September 30, 2003 alone, copper is up 62%, and nickel is up 49%.

 

There are many ways to get in on commodities like precious metals, as we've covered in past IU E-Letters. One that represents a decent value today is 100-year-old U.S. gold coins.

 

Commodities in some form deserve a place in your portfolio, in my opinion, for the rest of this decade, at least. What more evidence do you need that the dollar ain't worth what it used to be?

 

 

[jtryka]

Well, what it cost the government and what the metal is actually worth are two entirely different things. Personally, I save all the copper pennies I get in change, and I think copper has to go up to $1.55/lb. for the copper in a pre-1982 penny to be worth more than a penny. As for the zinc, I say forget about it! I'll be a long time before the value of the zinc ever exceeds the face value of a penny.

[Hoot]

I am curious Jeff why you discount the claims about the cost of making a cent and a nickel (and I'm asking because I truly want to learn more). I realize that all of the cost in making a cent or nickel is not in the metal, but how much will the prices of metal have to rise before we start seeing aluminum cents?

 

Hoot

[jtryka]

Hoot, Much of the cost of a coin is depreciation of equipment, overhead, General and Administrative costs, etc, all of which are included in costs of making coins. The metal is just one part of it. Here are the numbers for $1 (or 100) cents, both copper and zinc:

 

Copper cents are 3.11 grams 95% copper. 100 contain 295.45 g pure copper (100x3.11x0.95). In pounds, that equals: 0.6514 pounds (you can get quick metric and other conversions here: Convert-me.com ) To be equal to the $1 face value, copper must be worth at least $1.53516/lb. If copper is less than that then you are better off spending the coins (unless you are crazy like me) if more, better off melting them and making wire. Last Thursday, copper was at $1.308/lb, so a copper cent contained 0.852 cents worth of copper.

 

Zinc cents are 2.5 grams 99.2% zinc. 100 contain 248 g pure zinc(100x2.5x0.992). In pounds, that equals: 0.5467 pounds. To be equal to the $1 face value, copper must be worth at least $1.82916/lb. Like copper, if zinc is less than that then you are better off spending the coins if more, better off melting them and making galvanized steel or whatever they do with zinc. Last Thursday, copper was at $0.54098/lb, so a zinc cent contained 0.29575 cents worth of copper. So you can see, of the 0.98 cent cost for making a one-cent coin mentioned in the article, less than a third is the actual metal cost. As for aliminum cents, I personally believe they will eliminate it before aluminum (especially since aluminum is about 80% more costly than zinc which would mean the weight would have to be cut in half to justify the change).

 

Just my two cents, one copper and one zinc!

 

 

[EZ_E]

Wow, Jeff. Now that's a well-thought out post. It took more than just a couple of neurons to work that through. Thanks for the great post!

[jtryka]

Wow, Jeff. Now that's a well-thought out post. It took more than just a couple of neurons to work that through. Thanks for the great post!

 

You know, it was only math! I've always been good with math...

[Hoot]

Thanks Jeff. I wonder more about the costs associated with running the Mint, machines, etc. Governmental inefficiency can be extraordinary, but from what I understand, the Mint is a very profitable agency. So, when they start adding up the costs of making a cent or a nickel, I get worried that the denominations are being used to scapegoat the inefficiencies. At what point, however, will the Mint pull the pllug on our small denominations due to greater problems of inflation, waste, etcetera? I suppose any guess is valid.

 

Hoot

[EZ_E]

Wow, Jeff. Now that's a well-thought out post. It took more than just a couple of neurons to work that through. Thanks for the great post!

 

You know, it was only math! I've always been good with math...

 

Yeah, like it's only brain surgery. You know, I've always been good at that, too.