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How can a nickel rise in value at the same time that a dollar falls? The question may sound like a bad riddle from a Christmas cracker, but it has become a serious issue for the US Mint.
As a consequence of the soaring price of metals in recent years the metal in US nickel and cent coins is now worth more than the face value of the coins. One cent (which is almost entirely zinc) has scrap value of around 1.12 cents, while a nickel (which despite the name is 75% copper and 25% nickel) is worth 6.99 cents.
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The mint realised that this discrepancy could turn into a major problem when it began getting a number of queries about the legality of melting down coins. Fearing that some smart arbitraguers might be about to denude the country of nickels, the US government did what governments always do in these circumstances.
It changed the rules...
Until this month, melting down coins hasn't been illegal in the US. But from now on, dumping your chump change in the fondue set and turning it into an ingot could get you up to five years in prison and a $10,000 fine. If you're considering shipping coins out of the country for melting, that dodge has been kyboshed as well; henceforth, travellers can only carry $5 in nickels and cents out of the country.
This story appeals to us on two levels. The first is that it's an elegant illustration of the do as I say, not as I do' approach that governments are wont to take whenever they can get away with it. As a handful of commentators more versed in numismatic history than us have pointed out, melting down coins to make a quick buck is something that the US government has a history of doing.
Back in 1834, the gold content of coins was reduced, leaving older coins worth more than their face value. Consequentially, almost all 1795-1834 gold coins were melted down and the gold reused to make more coins with that same notional value.
More infamous was what gold bugs term The Great Confiscation' of 1933, when the Roosevelt government declared that it was no longer legal for private citizens to "hoard" gold coins and bullion. Any large holdings of gold were confiscated at a price of $20.67 an ounce and melted down into bars for the Treasury. Of course, shortly afterwards the price of gold for international transactions was raised to $35 an ounce, netting the state a decent profit.
But the second aspect is that you simply couldn't ask for a pithier encapsulation of how the dollar's value is being eroded. When the world's reserve currency is worth more in the vat than the till, there's a problem somewhere.
Despite the somewhat draconian nature of the new laws, you can see why the US Mint has done it. The margins involved on the nickel look as if they may be large enough to make melting worthwhile and a shortage of small change makes life very inconvenient. But regulations such as these don't the solution to the real problem - the debasement of the dollar.
For now, there's no guarantee that metal prices will get stay at these levels, particularly if the global economy weakens. But should the US continue to pursue its loose money policies, the dollar will continue to lose value against commodities (and probably against other currencies as well). If melting down your change is not to be a temptation for many years to come, the Fed needs to adopt tougher, tighter monetary policies for the long run and put the dollar back on a sound base. We're not holding our breath for that.
Turning to the stock markets
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In London, the FTSE 100 closed near a six-year high on Friday, ending the day 32 points higher at 6,260. BAE Systems led the blue chips higher with gains of nearly 7%, whilst record highs in the US also boosted sentiment. For a full market report, read: London market close
In Paris, shares closed at 5-year highs: the CAC-40 tracked Wall Street to a close of 5,541, a 32-point gain. In Frankfurt, the DAX-30 ended the day 36 points higher, having hit a 6-year high of 6,605 in intra-day trading.
Across the Atlantic, the Dow Jones set another record high close of 12,445, having gained 28 points as hopes of an interest rate cut next year were revived by unchanged consumer inflation data. The Nasdaq ended the day 3 points higher, at 2,457. And the S&P 500 closed 1 point higher at 1,427.
In Asia, the Nikkei closed at a 7-month high today on the back of strength on Wall Street and a weaker yen. The index was 47 points higher, at 16,962.
Crude oil last traded at $63.33 this morning, whilst Brent spot was at $62.78.
Spot gold had rebounded from a low of $614.90 and was last trading at $617.00 today. Silver, meanwhile, had edged up to $12.90/oz.
And in London this morning, telecoms company BT announced that its pension deficit had risen to £3.4bn. The firm has agreed to pay £280m a year into the fund, with the first three payments made upfront. The higher outcome of the triennial valuation - which has been attributed to longer life expectancy - will not affect the company's profit, according to a statement from BT.
And our two recommended articles for today...
How to profit from the growing demand for uranium
- Long-term worries about the scarcity of oil and environmental concerns have prompted a return to nuclear power. And that means greater demand for uranium, says Jim Slater. For his pick of two uranium stocks set to benefit, click here: How to profit from the growing demand for uranium
Why Vietnam is the new Asian tiger
- You can't have failed to realise by now that China is set to be a very big growth story in the years to come. But you may not have heard so much about what Citigroup calls 'the new powerhouse of south-east Asia' - Vietnam. John Stepek looks at the best way to get into this exciting market. Click here: Why Vietnam is the new Asian tiger
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House prices rise 2.9% – will the recovery continue?House prices grew by 2.9% on an annual basis in September. Will Budget policies and ‘higher-for-longer’ rates dent the recovery?
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Nvidia earnings: what to expectNvidia announces earnings after market close on 20 November. What should investors expect from the semiconductor giant?
