A Guaranteed Investment Scheme?

By Dr. Steve Sjuggerud, Chairman, Investment U
Thursday, July 14, 2005: Issue #452

Here’s a guaranteed investment scheme.

You and I buy up all the nickels we can get our hands on. Since the underlying metal in a nickel today is worth about 6 cents, we lock ourselves in at a guaranteed 20% profit by selling short the coin’s metal in the financial markets today. Then, to guarantee this investment scheme, all we need to do is melt down the nickels.

Okay, so it’s not so easy. And there’s probably some sort of law against this. But the reality is, at current metals prices, it costs the U.S. government about six cents to produce a nickel.

Leave it to the U.S. government to LOSE money by PRINTING money

In fiscal year 2003 (ending in September), it cost the U.S. government 3.78 cents to produce a nickel. In fiscal year 2004, it cost the government 4.56 cents to produce a nickel. And so far this fiscal year (from October 1, 2004 to present), the price of copper (which is the most prevalent metal in a nickel) is well above its fiscal year 2004 levels, meaning that it’ll likely cost the government about 6 cents to produce a nickel.

The penny is in the same boat as the nickel. Again, leave it to our government to lose money in something that should be enormously profitable. After all, the government can print as many dollar bills as it wants simply by printing the paper.

How can you LOSE money when you MAKE the money?

Of course, the government will not lose this game (though our fictitious investment scheme does prove a valuable point). The government will eventually be the one to earn the profit on the melt value of the coins as it takes them out of circulation. And no doubt, the government will soon change the metal content of the nickel and the penny, debasing the intrinsic value of the coins, as governments have done for centuries. (At the amazing rate of the destruction of the value of a dollar, chances are we’ll be spending plastic poker chips instead of metal coins in the not-too-distant future.)

Investment Schemes Aside, What’s the Right Thing to Do?

It’s not to bury a mountain of pennies and nickels in the backyard. And commandeering a fleet of trucks to collect nickels and melt them for their metal content as an investment strategy seems pretty extreme, and the scheme would most likely run afoul of government laws somewhere along the way.

The right thing to do is simply to have less paper and more metal in your assets.

The government can debase money. But it can’t mess with your metal. Two years ago, a nickel cost less than 4 cents to produce. Last year, a nickel cost almost 5 cents to produce. And this year, a nickel will likely cost the government 6 cents to produce.

The reality is, our paper dollars become more and more worthless every day. Based on the government’s own inflation statistics (the CPI), the dollar has already lost 80% of its purchasing power just since 1970. Said another way, what cost $2 in 1970 now costs $10 today.

They say “a nickel ain’t worth a dime anymore,” and it’s true. A nickel back in 1970 is actually worth 25 cents a quarter today.

The more I look for “no-brainer” assets, the more I’m drawn to investing in precious metals / commodity plays, including gold. While every other asset out there (stocks, bonds and real estate) has appreciated dramatically over the past 25 years, commodities, and gold in particular, have gotten cheaper and cheaper. Adjusted for inflation, gold is unbelievably cheap.

Commodity plays, even though they have risen, are still worth owning. At the very least, I feel that you must own some of my recommended commodities and gold plays, simply to hedge your risk of the hidden loss in value every year of owning paper assets.

And if all else fails, there’s always the copper nickel investment scheme.

Good investing,

Steve

Today’s Investment U Crib Sheet

• See for yourself the actual rise in the cost of copper and its effect on the coins. 

• To get the skinny on inflation and what it’s done to your purchasing power since 1970 (or any period that you’d like to check) give this handy inflation calculator a try.

• Yamana’s (NYSE: AUY) Golden Place to Be
• Gold: This Commodity Loves Economic Upheaval
• Hyper-Inflation: Central Banks Gone Wild

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