A huge opportunity to hedge against both inflation and deflation is lying out there in the open. There are no transaction costs and right now there’s even a built-in discount. But most people will never realize any of this.
In 1933 President Franklin Delano Roosevelt signed Executive Order 6102, which made it illegal for US citizens to hold gold bullion.
Prior to that order, the $20 bill was essentially a warehouse receipt for a one-ounce gold coin. Prior to the Federal Reserve Act of 1914, the $20 bill actually told you this.
After Executive Order 6102, $20 notes weren’t allowed to be exchanged for gold anymore. Americans couldn’t legally own or trade gold as money and savings, only as jewelry or collectible coins.
A year after making monetary gold ownership illegal, FDR revalued gold from $20.67 per ounce to $35 an ounce with the Gold Reserve Act. The Act also required all gold and gold certificates to be turned over to the Treasury.
The dollar was debased. Instead of “containing” 1/20 an ounce of gold, each dollar now only contained (or represented) 1/34 an ounce. And of course you couldn’t actually own the gold itself. In 1971 Nixon severed the last official ties between gold and the dollar. The dollar quickly sunk to its real value, which had been debased by years of money supply inflation.
By 1975, Americans were allowed to own bullion gold again, but during the roughly 40 years bullion gold ownership had been illegal, the dollar had been drastically debased. At its former lowest point in the summer of 1980, the dollar was worth only 1/850 an ounce of gold. It regained some value for a while, but right now a dollar gets you less than 1/1300 an ounce of gold.
That was the story with a piece of paper that was merely standing in for a monetary metal. But what happens in the case of circulating coins actually composed of monetary metals?
Let’s look at quarters, dimes, nickels and pennies…
- Prior to 1964, US quarters and dimes were 90% silver. From 1965 to 1970 they were 40% silver “clad” over a copper-nickel or “cupronickel” mix. Like the paper dollar, quarters and dimes were debased in two stages. Now quarters and dimes have no silver in them at all. They are now entirely copper and nickel, but only enough to get a little more than 1/4 their face value.
- Prior to 1983, US pennies were 95% copper and 5% zinc. Pennies minted after that are 97.5% zinc with only 2.5% copper plating.
- The US nickel has been cupronickel since 1946: 75% copper and 25% nickel with trace amounts of manganese. But that’s probably about to change…
Why are quarters and dimes no longer silver? Why is the penny no longer mostly copper? And why will the nickel likely follow suit fairly soon?
Because the amount of silver and copper and nickel in each case came to exceed the face value of the coin. The debasement of the US currency over time has required the metal in the coins to be replaced with a cheaper substitute.
The average American has no idea what inflation really is or why currency debasement is a problem at all. He figures one metal is as good as another in minting of the currency…that when the face value of a coin falls below the value of the metal in the coin, it’s nothing more than a curiosity. Substitute a cheaper metal, they think. Problem solved.
And indeed the problem is solved for the government, which mints the coins made of real money at a loss after the effects of bouts of the inflation started by monetization of government debt. For savers and the overall economy on the other hand…their problems are just beginning…
But that is a story for another time. For now let’s look at the opportunities to be had when the government makes metals available for a fraction of their market price via coins…And let’s see if there are any opportunities left (Hint: there are!).
If you had seen the writing on the wall in the early 1960s and started hoarding quarters and dimes while they still were almost wholly silver, you would have found that your dimes were worth a high of $3.57 each in 1980 and your quarters were worth $8.93 each.
In fact, these 90% coins still trade just like regular silver bullion bars and rounds. They were taken out of circulation – “hoarded” – by those savvy to debasement (Gresham’s Law tells us that good money will be hoarded when bad money floods the market). These coins were collected without any transaction costs. They were bagged up with different face value totals: $1,000 bags, $500 bags, $250 bags, $100 bags and $50 bags.
Each of these bags traded for over 35 times their face value because of the silver in the coins. At least they did at silver’s peak in 1980. Even during the ensuing 20-year slump in silver prices, the value of silver bullion coins never dipped below three times face value.
And now, thanks to waves of money and credit expansion from the Federal Reserve, silver is pushing back toward its old highs. These bags of silver coins are trading at more than 20 times their face value. They may hit 30 times face value again…and beyond…
Silver probably has another trick or two up its sleeve. But let’s turn our attention to the humble nickel…
Every single circulating nickel still has 3.75 grams worth of copper each…along with 1.25 grams of nickel. Copper is currently about $4.46/lb. Nickel is currently about $12.97/lb. So if you do the math, each nickel is worth about 7.3 cents.
120 nickels pieces is worth $6.00 at face value. Those 120 coins contain about a pound of copper and 1/3 pound of nickel. That’s about $8.76.
You can’t cash in on this arbitrage directly (anti-smelting laws for pennies and nickels were introduced in late 2006). But the bullion market for cupronickel coins will develop, just as it did for silver US coins. This will happen once the government starts minting five-cent pieces made out of cheaper metals.
To those who doubt this will happen, I refer you to the bags of silver coins trading as bullion for over 20 times their face value. You can easily order such a bag right now by going to any of a number of online bullion dealers. These bags of coins sell right alongside silver bars and rounds.
Right now, the government is subsidizing your copper and nickel purchases…and cutting out the middleman. As much as we complain about government, we ought to stop and offer them a little thanks for this one.
What’s even more interesting is that hoarding nickels provides an imbedded hedge against deflation. That’s because a nickel will always be worth a nickel, at least. So if the dollar strengthens and copper, silver, and gold all get cheaper in dollar terms, you can still spend your nickels just like any other money. Your purchasing power stays the same, maybe even increases.
But if the dollar declines, then the value of the cupronickel in the currency will rise against the face value. Eventually – at two or three times face value – these five-cent pieces will trade as bullion just as 90% silver quarters and dimes did and still do.
Again, there is currently no transaction cost to saving in nickels and no risk from plummeting metal prices. There is literally nothing (in case of deflation) to lose and everything (in case of inflation) to gain.
Your only real problem is storage; a few thousand dollars of nickels takes up a lot of space…and it’s heavy. But people had the same problem with silver when it was cheap. I doubt they’re complaining now.
Having “too much” cupronickel won’t seem like much of a problem if inflation continues to drive the cupronickel in five-cent pieces far in excess of face value. The cupronickel is America’s last piece of honest currency.
Regards,
Gary Gibson,
for The Daily Reckoning
Today’s Best Investment…Rhymes With Pickles originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.
The future of biofuels is becoming less about biofuels and more about soap.
In particular, it’s in the chemicals and food additives that go into items like soap, rubber, plastics and protein bars. As investor appetite for ethanol startups has soured, biofuels companies are leveraging their technologies to pursue opportunities in chemicals and food.
Why chemicals and not biofuels? For one, biofuels have proven to be expensive and difficult to scale. While biochemicals — chemicals made from renewable sources — aren’t necessarily cheaper to produce, they can sell for a lot more money.
“Fuels are basically cheaper than water,” says Mark Bunger, analyst for Lux Research. Commonly used chemicals like polyethelene and polyvinyl chloride, widely used to create plastics, can be sold at a higher price than ethanol. So biochemical makers could potentially make more money and have higher margins.
Biochemicals are also more in demand now that some of the raw materials for traditionally made chemicals are difficult to get or increasingly expensive, Bunger says. Think of petroleum-derived plastics and rubber, or vanilla, which requires the tending and refining of a crop.
Biofuels startups have moved to make chemicals and food additives part of their business. Solazyme has a joint venture with food ingredient company Roquette and is working to develop renewable oils to for soaps made by Unilever. LS9 has a chemicals partnership with consumer goods titan Procter & Gamble. Gevo, which made a $107 million initial public offering yesterday, is working on producing bio-based isobutanol, an alcohol compound used in rubber and lubricants. Last year, algal biofuels startup Aurora changed its name from Aurora Biofuels to Aurora Algae to reflect a new approach that focused on making food and pharmaceutical ingredients.
Lux Research foresees that biomaterials production will grow faster than biofuels, with 17.7 percent growth each year, driven by big corporations. The company estimated the global bio-based chemicals market to be worth $11.7 billion last year, up 7 percent from 2009. The company expects the market to grow another 7 percent this year to reach $12.6 billion. The Cleantech Group last year noted a rise in venture capital funding deals for biofuels firms that also made biochemicals.
Other companies are focusing on biochemicals from the start. Synthetic Genomics works with Exxon in a chemicals and biofuels alliance centering on algae technology (Exxon mentioned the company in a recent commercial featuring algal biofuels). Genomatica is another startup in this space, and today it announced a deal with major waste services company Waste Management in which it will research chemicals that can be created from synthetic gas, or “syngas”, captured at landfills.
“The plastic in your cell phone to the paint on the wall, fibers in carpets — all of this stuff comes from the chemicals industry. All of these materials, about 95-plus percent of them (are derived) from oil and gas,” said Genomatica CEO Christophe Schilling. “We’re looking to make the same exact chemicals but from renewable feedstocks.”
It’s not just the startups, either. Major petrochemical companies like DuPont, BASF, DSM and Dow have been broadening their reach because there’s more competition in their core businesses and because of the supply strain on raw materials. DuPont recently paid $6.3 billion for Danisco, with which it has a biofuels agreement. Danisco itself makes food ingredients and industrial enzymes using bio-based processes. And DSM recently paid $1.1 billion for Martek, a food company that specializes in microalgae and fermentation.
And that’s why the future of biofuels is in your food and soap.
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