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.
