Monday, October 17, 2011

Looking For An Alternative To Gold And Silver?

In "Boomerang: Travels in the New Third World," author Michael Lewis clues readers into a conversation he has with successful hedge fund manager Kyle Bass of Hayman Capital. Lewis portrays Bass as a smart, patriotic, and eccentric investor. The Kyle Bass story is well known at this point. Bass bet on the crash of residential real estate by trading securities based on subprime mortgages to the least credit-worthy borrowers.
Lewis’ book highlights an interesting and “off the fairway” bet that Bass has made. Bass has purchased $1 million worth of nickels. Bass took physical delivery of these 20 million five cent nickels. Bass’ thesis is relatively simple in that the U.S. mint will eventually change the composition of the five cent nickel due to the rising cost of materials. Bass, seeing money printing and currency debasement as a major issue, believes that physical nickels could provide a store of value. At a time when gold and silver remain pricey and volatile, investing in five cent nickels could provide an inflation hedge (with an embedded floor).
The 1946 - 2011 Nickel
Total Weight: 5 grams
Metal Composition: 75% copper, 25% nickel
$3.0801 = copper price / pound on Oct 03, 2011
$8.4395 = nickel price / pound on Oct 03, 2011
Calculating the “melt” or intrinsic value for the 1946 - 2011 Nickel is relatively easy:
1. Calculate 75% copper value:
(3.0801 × .00220462262 pound/ gram × 5.00 grams × .75) = $0.0254637
2. Calculate 25% nickel value:
(8.4395 × .00220462262 pound/ gram × 5.00 grams × .25) = $0.023256
3. Add the two together :
$0.0254637 + $0.0232569 = $0.0487206
The Cost of Production
The U.S. Mint publishes the cost of production (cost of good sold), which includes the material cost of minting coins. According the U.S. Mint annual report (pdf), the cost of producing a nickel is approximately 9 cents.
Embedded Floor
As opposed to the price of gold or silver, there is an embedded floor in the price of a five cent nickel. While the thesis surrounding buying physical nickels is one of inflationary pressures, the purchase of nickels also guards against deflation. In a deflationary environment owners can go back to the bank with their nickels and exchange them at 20 per dollar. The website highlights the number of U.S. coins that have changed composition over the years. The 1942-1945 Nickel has a silver value of $1.7346 or 3469.22% increase over the five cent face value.
Investors looking for an alternative to gold (GLD) or silver (SLV) should think about buying nickels.

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