United States legal tender nickels present an almost
completely risk-free investment. Getting a large 5 gallon bucket and
tossing in the nickels from your daily change is an excellent way to preserve
your purchasing power, protect your wealth and reduce both counter-party and
payment risk. But due to increasingly despotic threats and actions by
the United States government this avenue for wealth preservation is being
threatened.
PURCHASING POWER
The current melt value of 1946-2009 nickels is about
$0.0465604 or 93.12% of the face value. A great resource to track the
current melt rates of United States legal tender money relative to
Federal Reserve Note legal tender currency
is Coinflation.com.
Each nickel is 5.00 grams and consists of 75% copper
and 25% nickel. Thus, a $10 box of nickels, or 200 nickels, weighs
1,000 grams or about 2.2 pounds. This would be about the size of two
bricks. With some gold spray paint and the unverified shortage of LBMA quality bullion you may even be able to get the problematic GLD ETF
to buy a few bars.
COUNTER-PARTY RISK
Nickels are usually available for withdrawal from
your local bank. Since so many banks are failing and so many others are
in worsening financial shape it makes since to keep minimal cash balances in
your account(s) unless you know of their financial soundness. The
FDIC’s reserve fund is in horrible shape but the $500B line of credit
with the Treasury should keep formal bank runs with lines, like Disney Land
used to have, at a minimum.
But a physical nickel in your hand has intrinsic
value and can never become worthless which makes it immune to payment risk.
By taking possession instead of keeping the electronic digits in your
bank account you completely eliminate that degree of counter-party risk.
Additionally, you pay no
fabrication fees unlike purchasing gold, silver or platinum.
MISH’S MISSTATEMENTS OF FACT
Mike Shedlock of Global Economic
Analysis in an article
titled Analysis: Ridiculous Hype Over Secret
Oil Meetings wrote:
Ten Simple Facts
5) It takes less than a second for Forex trades to
take place. 24 hours a day, 7 days a week, one can sell any currency they
want and buy any other currency.
6) The above logic applies to any currency and any
commodity.
7) Nothing is stopping anyone at any time anywhere
from selling dollars for whatever currency they want to hold. Nor is anything
stopping anyone anywhere at any time from selling any major currency for U.S.
Dollars.
Because currency conversion is instantaneous no one
has to hold U.S. dollars to buy oil, copper, gold, iron, lead,
wheat, soybeans, or anything else.
While I will not address the substantive analysis of
his article I would like to address several
misstatements of fact and offer analysis on potential likely
changes to the landscape.
CURRENCY CONTROLS
First, as stated in #5 the ability to ’sell any currency they want
and buy any other currency’. Foreign exchange controls are
various overt
forms of controls imposed by a government on the purchase or sale of foreign currencies.
These controls can take many forms including, (1) banning the use of
foreign currency within a country, (2) banning locals from possessing foreign
currency, (3) restricting currency exchange to government-approved
exchangers, (4) fixed exchange rates or (5) restrictions on the amount of
currency that may be imported or exported. Section 14 of the
International Monetary Fund agreement provides for currency controls for
transitional economies.
While Mish may attempt to narrow the discussion from
‘any currency and any commodity’ to any major currency or the
currencies of major economies I think doing so fails on both counts as China
imposes overt foreign exchange controls, had a 2007 GDP of $3.5T, began to sell sovereign bonds to foreigners
in September 2009 and is a
formidable force in the global economy. Therefore, to categorically
state that anyone can sell or buy any currency or commodity through the
extremely liquid FOREX markets is a blatant misstatement of fact. But
this surface analysis is even more potent if one keeps digging.
Second, I am unsure what Mish means by ‘Nor is anything stopping
anyone anywhere at any time from selling any major currency for U.S. Dollars.’
Drawing upon Dr. Vieira’s previous work I address the issue of what is a dollar as applied to the
recent Kahre case. An excellent book on the subject is Murray
Rothbard’s What Has Government Done To Our Money. The actionable
conclusion for IRS purposes is to distinguish
between FRN dollars
and U.S. Dollars
as found under 31
U.S.C. 5112. This
difference leads to a capital gains tax on gold or silver, which are both
commodities and currencies.
Interestingly, Section 408(m), applicable to retirement accounts, provides
exceptions for legal tender gold and silver coins along with ‘a coin
issued under the laws of any State’. The IRS also issued a private letter ruling that ‘The acquisition by an IRA of shares in trusts which hold
gold and silver bullion as their only asset will not constitute the
acquisition of a collectible under Code Sec. 408(m).’
If a capital gain tax rate greater than 25% is not a
draconian currency control in practice then I am not sure what is.
Because both FRN$, gold, silver, copper and nickel are legal tender
thus in practice this capital gains tax is perhaps the single largest
protection of the FRN$’s fiat currency monopoly which leads to its
market dominance and world reserve status. Yes, all Dollars are dollars but
some Dollars are more equal than others.
Third, as I analyzed in June 2009 the United States Treasury issued
additional overt currency controls on United
States legal tender in 2006. The announcement provided:
The United States Mint has implemented regulations
to limit the exportation, melting, or treatment of one-cent (penny) and
5-cent (nickel) United States coins, to safeguard against a potential
shortage of these coins in circulation. … Prevailing prices of
copper, nickel and zinc have caused the production costs of pennies and
nickels to significantly exceed their respective face values.
“We are taking this action because the Nation needs its
coinage for commerce,” said Director Ed Moy. “We don’t want
to seeour
pennies and nickels melted down so a few individuals can take advantage of
the American taxpayer. Replacing these coins would be an enormous cost to
taxpayers.”
Specifically, the new regulations prohibit, with
certain exceptions, the melting or treatment of all one-cent and 5-cent
coins. The regulations also prohibit the unlicensed exportation of these
coins, except that travelers may take up to $5 in these coins out of the
country, and individuals may ship up to $100 in these coins out of the
country in any one shipment for legitimate coinage and numismatic purposes.
In all essential respects, these regulations are patterned after
the Department of the Treasury’s regulations prohibiting the
exportation, melting, or treatment of silver coins between 1967 and 1969, and
the regulations prohibiting the exportation, melting, or treatment of
one-cent coins between 1974 and 1978.
The new regulations authorize a fine of not more
than $10,000, or imprisonment
of not more than five years, or both, against a person who
knowingly violates the regulations. In addition, by law, any coins exported,
melted, or treated in violation of the regulation shall be forfeited to the
United States Government.
In conclusion, the assertions in Mish’s
“Ten Simple Facts” of substantive statements of fact are actually
complete misstatements.
For example, if an individual wants to withdraw a
mere $10 of legal tender nickels, or 2.2 pounds, from their bank account and
melt the coins down to create a doorstop then they face a fine of $10,000 and
imprisonment of not more than five years. If they sufficiently resist
then the costumed criminal gang will escalate the unjustified aggressive violence
and inflict death. It would be nice to live in the fantasy world Mish
describes where ‘Because currency conversion is instantaneous no one
has to hold U.S. dollars to buy oil, copper, gold, iron, lead,
wheat, soybeans, or anything else.’ but that is simply not the case.
Additionally, I have not addressed other enacted or
pending legislation in both the America and the Eurozone that lays a strong
foundation for additional currency controls to be implemented.
CONCLUSION
Nickels are made copper and nickel which are
tangible assets that have intrinsic value. They are an excellent
vehicle for protecting and preserving one’s purchasing power.
Nickels are approaching the point where, like gold, silver and copper
coins, their face value will be less than their melt value. But in
anticipation of and to impede the free flow of capital the United States has
imposed overt foreign exchange controls on nickels and pennies with draconian
penalties.
Disclosures: Long physical gold, silver, platinum and some nickels with no
position in the problematic GLD or SLV ETFs.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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