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Source link: http://archive.mises.org/3335/coin-clipping-and-the-resource-boom/

Coin Clipping and the Resource Boom

March 16, 2005 by

From the Daily Reckoning:

    “A penny now costs two cents to produce! It cost the U.S. government 3.8 cents to produce a nickel and 0.98 cents to produce a penny, according to the U.S. Mint’s last annual report, dated September 30, 2003. We haven’t heard from the Mint since then, but metals prices have nearly doubled. By my quick math, as of this morning’s metal prices, it would cost 1.7 cents to produce a penny and 7.2 cents to produce a nickel today. Am I the only one who’s ever run these numbers?
    “The government needs raw metal to produce the coins. Anyone want to go in with me and set up a metal recycling business outside the mint? We buy freshly minted pennies and nickels for 1 cent and 5 cents respectively, melt them down, and then sell the metal back to the mint for 1.7 cents and 7 cents. It’s the perfect business…

    “Don’t we wish – what’s more likely is the government will take the profits for itself. It will have to change the metal content of the coins. Older, worn coins will be turned in (if we’re not forced to turn in our old coins), and the government will melt them and make the profit for itself. Argh! You do own gold coins by now, right?”

Is coin clipping still with us? Coin clipping was a more ancient method of inflation prior to the age of paper money and central banking, in which coins were physically clipped, or in a more sophisticated version, called in, melted down, and recast with a lesser gold content.

Another irony here is that the current bout of commodity price inflation is partialy a monetary phenomenon, but partially due to a long-term under-investment in the production of basic materials. This bust followed on from the commodities boom of the 70s. Rampant inflation showed up mostly in commodities at that time. Some of the all-time nominal price peaks of the 70s have not yet been supercided in spite of the dollar having lost about 80% of its value since then. Gold peaked at around $875 and silver around $50, which in real terms at today’s prices would be around $4400 and $250 respectively.

Energy and mining stocks were the tech stocks of that decade. The S&P 500 index, which is now dominated by techs and financials, was at the time heavy with natural resource producers. Oil & gas IPOs were floated like tech IPOs during the bubble. This inflationary excess 70s resulted in a mal-investment in the natural resource sector.

As inflation was dissipated by the Volker Fed, the natural resource boom turned into a bust. A generation of aggressive managers was replaced by conservatives who would rather return any cash flow to the share holders than put it back in the ground. Exploration was considered a wasteful venture when there were huge stockpiles of many materials. (The inventory of copper in London depository is about two days of world consumption).

Now we have come full circle, with stockpiles having dissipated, decades of excess conservatism in the natural resouce sector resulting in a lack of new supply ready to come on line, and three decades of price inflation giving us a tight supplies of copper and nickel.

{ 13 comments }

Pete Canning March 16, 2005 at 10:11 pm

The metal content of pennies is hardly the largest cost in producing a penny.

David Heinrich March 16, 2005 at 10:22 pm

Pete,

Do you have any refs on that?

Sincerely,
David Heinrich

Pete Canning March 16, 2005 at 10:42 pm

A penny weighs 2.5 grams. It is 97.5% zinc. The current spot for zinc is $.6423/lb. There are 453.59 grams in pound. Thus, the zinc is worth about $.00345.

The lowest zinc spot was around .35/lb in 2003. Thus, the change in the price is hardly significant. 1/6th of a cent or so.

The copper spot is $1.5421. Thus, the copper content is worth almost nothing. Or .000085. I don’t feel like figuring out the difference copper has made in the price.

Maybe a penny now costs more than a penny to make now, but not by much. Don’t plan on melting anything down any time soon. However, your pre 1982 pennys are 95% copper, those might do you some good. They are worth a little less than one cent if sold for scrap.

Greg Feirman March 16, 2005 at 11:44 pm

Robert,
Just curious: do you favor investing in commodities futures or the equities of companies in commodities markets? It seems to me like natural resource equities are already, in general, pretty expensive and so the route to go is the actual commodities themselves via futures. Any thoughts? Thanks!
—— Greg

P.M.Lawrence March 17, 2005 at 1:07 am

That’s wrong about the penny. It’s not a penny being described at all, but a US one cent piece, and the zinc represents past adulteration.

A real penny, until decimalisation, was 1/3 oz of copper. Even after the new penny came in, it soon happened that the copper coinage was wrongly priced. I have heard of a theatrical production that wanted to scatter sequins on stage, only to find that at 3p each it was cheaper to use similar sized 2p pieces.

But the Dutch used the trick in reverse in the East Indies, bringing in a depreciated new currency to start with, to finance setting up the “culture system” of exploitation.

Mike Runge March 17, 2005 at 1:19 am

Greg, on commodities you may want to read Don Coxe if you haven’t already:

http://www.siliconinvestor.com/readmsg.aspx?msgid=21083005

Daniel Franke March 17, 2005 at 5:28 am

I think your estimates are a bit high – remember that the cost of producing a coin doesn’t only include the cost of the metal, but also building maintainance, machinery, electricity, labor, distribution…

Timm Engel March 17, 2005 at 10:33 am

A friend of mine recently reminded me that the US Mint is also a ‘private’ business in that it makes a profit when accepting other nations fiat money in exchange for our printing or minting their currencies! Also look at the ‘irony’ of Mosambique where the gov. is so broke that they can’t afford to buy the imported paper or ink on which their currency is printed!

Pete Canning March 19, 2005 at 7:00 am

No one found my calculations interesting? Hmmm.

Chris Strong March 25, 2005 at 4:01 am

When I went to the Denver Mint they had this wonderful video about how they actually sell the specie and currency they make to the fed. I suspect that the video is at all the mints, as they made sure not to say “Denver Mint” during the actual informational part, so I suspect that it is playing at mints across the country.

They also sell coins of all the presidents, I bought my W. H. Harrison coin, one of my favourite presidents, for 2 dollars.

Johnny April 5, 2005 at 8:22 pm

I didn’t read Don Coxe’s book, but I really sort Canadian Nickel in big way ( target 1 million ). I notice it 4 years ago. Canadian mint produce nickel with pure nickel before 1981, but between 1982-2000, the contents same as US, 25% nickel 75% copper. After 2000, the metal cotents are 98% steel, 1.5% copper and 0.5% tin. I sorted out all nickel dated before 1981. I do it for an ideal to against central bank’s exploiting trick to all people.

Johnny April 5, 2005 at 8:25 pm

Correction: After 2000, the metal cotents are 98% steel, 1.5% nickel and 0.5% tin.

Trey Auld August 21, 2005 at 4:31 pm

Cool

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