January 19 (reference month: December 2011)

February 17 (reference month: January 2012)

March 16 (reference month: February 2012)

April 13 (reference month: March 2012)

May 15 (reference month: April 2012)

June 14 (reference month: May 2012)

July 17 (reference month: June 2012)

August 15 (reference month: July 2012)

September 14 (reference month: August 2012)

October 16 (reference month: September 2012)

November 15 (reference month: October 2012)

December 14 (reference month: November 2012)

Copper portion: 4.24 * (5 * .0022046 * .75) = .03505
Nickel portion: 11.95 * (5 * .0022046 * .25) = .03293
Combined: .03505 + .03293 = .06798

A Nickel is actually worth 6.8 cents, not the 5 cents we’ve been led to believe! Is there an arbitrage opportunity? Not really, at least not currently. In 2007, Congress passed a law banning the melting of nickels and pennies (http://www.usmint.gov/pressroom/index.cfm?flash=yes&action=press_release&ID=771). Additionally, as long as you can go to your local bank and request nickels for face value its very doubtful you would receive more than 5 cents for them in the public marketplace.

Those times may be changing though. Last year, Congress passed the Coin Modernization, Oversight and Continuity Act of 2010. This act empowers the US Mint to research coin compositions and recommend changes to the metallic content of US coinage. A new act or law would need to be passed to actually change the composition though.

This would not be the first time a change was made in coin composition. In 1965, silver content was removed from dimes and quarters and reduced in half dollars. There is currently no melting ban on pre-1965 silver coins. Once the composition of a nickel changes, you can bet older CuNi nickels will be lifted from circulation by enterprising individuals. The advantage of hoarding nickels now is that no sorting of nickels is required. Nearly all nickels in circulation today are the same 75% copper / 25% nickel composition.

There is of course always an exception, but in this case its a good one. For about 3 years from 1942 to 1945 the composition of the nickel was different. These are referred to as War Nickels. During WWII nickel was needed for the war effort (armor plating), so the US Mint changed the composition of the nickel to an alloy of 35% silver, 56% copper and 9% manganese. These nickels still weighed 5 grams, but are worth over $2.40 today, primarily because of their silver content. In a box of 2000 nickels ($100 face value) you could probably expect to find 1 or 2 silver nickels on average. Hardly worth the time to sort through them!

As soon as that law is no longer in place, you could expect a market to be created for these coins. That won’t happen though until the composition of the nickel and penny changes. And even when it does, it may be some time before the melting ban is lifted. If you are willing to wait though and store these coins longer term, the payoff could be larger than expected. Remember that in 1964 the silver content of dimes and quarters were just approaching the face value of the coins and today a single pre-1965 quarter is worth over $7.75 and a dime is worth over $3.10. These prices are easily achieved on marketplaces like eBay. Some day nickels that are selling for face value today could fetch a great deal more. And if this prediction is wrong, you will not have lost any real money as a nickel will still be worth five cents. You will have only lost the opportunity cost foregone by storing the coins.

Hoarding nickels could be another opportunity for you to have a hedge against your personal inflation rate and to protect your buying power!

The answer could be found in precious metals. Gold and silver over time have proven their resilience to inflation. There have been extended periods of time where gold and silver have lost value though as well, so it’s not a fool proof proposition. Everyone likes to point out the peak price of gold that was seen for a brief moment in January 1980 of $850 per ounce and use that as a starting point for showing how gold lost money over the next two or three decades. However, the price of gold in December 1979 was below $500 an ounce and by February 1980 the price was already back below $650. So take those stats with a starting price of gold in 1980 at $850 with a grain of salt. We could just as easily use a starting point of August 1971 with gold at $35 an ounce to show spectacular gains over time.

There are many ways to invest in gold and silver. American Eagle bullion coins are one very popular method. Many people like the personal security and feeling of value in their possession by the physical ownership of gold or silver American Eagle coins. Taking ownership of physical coins has its risk though. You must securely store these and keep them safe from theft, fire, or other threats. Insurance is an option, however precious metals are not inexpensive to insure and many people find that the costs outweigh the risks and find other means to protect their investment. Safety deposit boxes are certainly an option as well and do provide a great deal of security (at a cost).

Another option of gold and silver ownership is through the securities market. There are ETF options available which give you rights of ownership to gold or silver. These are just “rights” though and you do not physically hold possession of the precious metals. These are paper assets and only as good as the word of the issuing company of the ETF. The advantages include ease of ownership, high liquidity and not having the direct costs or risks associated with storage (although there are some fees built into the price of the ETF to reflect these costs).

A third option to consider is the ownership of pre-1965 United States circulation quarters, dimes and half dollars. Prior to 1965 quarters, dimes and half dollars minted and circulated by the US Mint consisted of 90% silver. Kennedy half dollars continued to be produced at 40% silver content through 1969. These coins still exist today and are hoarded by many enterprising individuals. You could potentially even find these in your spare change, although most pre-1965 quarters, dimes and half dollars were pulled from circulation long ago by the hoarders.

Consider a favorite story mine showing the power of precious metals as a protector from inflation. In 1964, a quarter could buy you a gallon of gas. In 2011, gasoline is now over $3.50 a gallon in most locations, however that same 1964 90% silver quarter has a silver content value of $6.20 today (with silver trading at $34.27 an ounce). You could sell that 1964 quarter and buy one and three quarters gallons of gasoline today. Is gasoline actually cheaper today than it was in 1964, or is it just that our US dollars have depreciated against the value of precious metals?!

An advantage of holding pre-1965 silver coins are the ease of storage and non-attention calling these coins bring. If a thief were to break in your home and found a stash of spare change that wasn’t bagged or marked in a special way, it’s very unlikely they would even bother looking twice at them. They’re more interested in your flat panel television or other items in your home that are likely covered by your insurance policy. Additionally, in a state of emergency or extreme difficult times, the coins are still considered legal US tender and could be used for purchases, however they are much more valuable for their silver content as demonstrated with our gasoline example.

There is a large and liquid market for pre-1965 silver coins as well. A quick check on ebay and you’ll find these coins sell quite well and you can easily list and sell the coins for their silver value or even greater if the coins are in what collector’s consider above average condition. If you go to your local coin shop you’ll likely get at least somewhat close to the value of the silver content, but the loss could be worth it to some for the convenience of the sale.

There are other precious metals and base metals that can protect your buying power as well. Platinum, palladium, copper, nickel, etc. all have inflation protection characteristics. I’ll write a future blog post about the pre-1982 copper penny at a later date. Until then consider your personal inflation rate and what you need to do to protect the buying power of your money over time!

January 14 (reference month: December 2010)
February 17 (reference month: January 2011)
March 17 (reference month: February 2011)
April 15 (reference month: March 2011)
May 13 (reference month: April 2011)
June 15 (reference month: May 2011)
July 15 (reference month: June 2011)
August 18 (reference month: July 2011)
September 15 (reference month: August 2011)
October 19 (reference month: September 2011)
November 16 (reference month: October 2011)
December 16 (reference month: November 2011)