Investing in Copper Bullion: Worth It or Not?

I was interested in investing in physical copper and began shopping around and doing some research.  I compared prices of different forms of copper bullion as well as a comparison of different dealers.  Then I began to break down the actual cost of investing in copper bullion compared to its spot price.  What I found is that investing in copper bullion is quite expensive (if my math and logic is correct, which I will attempt to explain next).  Note: All figures following are based on prices as of 20Nov2011.

For instance, at one very popular online dealer I could buy 1 av oz. of copper for $1.85.  At 16 av oz to the pound you can see that you would be paying $29.60 per pound of copper.  As of today, the spot price for a pound of copper is about $3.40.  So, this didn’t seem like a very profitable option.  I understand that there is the cost of minting and stocking and all of that, but this seems like an extremely high premium.

Next I found an ‘auction’ at a certain online site that was selling 20 8oz copper bars for $105 (including shipping).  So, for the math:  $105 divided by 160 oz gives us approximately $.66 per oz.  Significantly cheaper than the one oz coins but still costing $10.50 per pound of copper.

Finally, I remembered that I had posted an article on here not to long ago about saving nickels because they are made up of 75% copper and 25% nickel.  So I did the math to see how cost effective this would be.  Here’s the numbers:  A roll of nickels weigh in at approximately 7.05 oz.  Figuring only the copper content we multiply 7.05 by 75% and get approx. 5.29 oz of copper.  A roll of nickels cost $2 so we are paying only $.38 per ounce or $6.05 per pound of copper (much closer to the $3.40 spot price).  And the great thing about this is that we still value in the 25% of nickel that we haven’t in figured in.  So this seems the most cost effective way to gain exposure to the copper market.  (Also, pre-1982 pennies are 95% copper and have a melt value of about $.02 or double the face value)

So, if my thinking is correct and I haven’t missed anything, the best way to invest in copper would simply be to buy rolls of nickels.  One great thing about this is that your investment in nickels will at the very least be worth what you’ve invested in them (dollar wise).  For example, you buy one roll of nickels for $2.  That roll of nickels is always worth at least $2 due to the face value, but can always increase in value due to the metal content in them.  So, it’s kind of like an investment where you can never lose your principle contribution but can enjoy upside potential.  I say ‘kind of’ like a no-lose situation because their is the risk of inflation. Inflation will cause your $2 roll of nickels to buy less in the future based on FACE VALUE, therefore the metal content value must outpace or match inflation in order for this investment to be worhtwhile (which I believe it will and I’ll try to explain).

The nickel is a unique coin today because it is still made of material that is valuable, copper and nickel.  When copper and nickel are doing well in the market, a nickel can be worth more in melt value than in face value.  Here recently, the melt value of a nickel was around $.07.  So, it was worth $.02 more in metal content than in face value.  Another way to put it:  You could have bought a $2 roll of nickels for $2 dollars, of course, and you would have been holding an asset of copper and nickel worth $2.80 (40 nickels times $.07).  Currently a nickel is worth about $.05 due to the recent decline in copper price.  That doesn’t mean that nickels aren’t worth a look, however.  When copper prices go back up nickels will once again be worth more than face value.  Another way that nickels are unique is that all other coins minted today are made of near worthless metals and are worth only a fraction of the face value of the coin. A post-1982 penny, for example, has a melt value of about 1/2 of 1 cent. A post-1965 dime has a melt value of about $.02!  So, just the fact that a nickel is worth $.05 melt value is an accomplishment.  You can see all of the data that I used here at Coinflation.com  Keep in mind that all the numbers I have used here are based on metal prices as of 20Nov2011.

So I said that an investment in the nickel would match or outpace inflation and be a good store of wealth.  Here is the theory and my understanding.  As inflation goes up the purchasing power of the FACE VALUE of a nickel (and all money for that matter) diminishes.  When the purchasing power diminishes it takes more money to buy goods like copper.  So the price of copper goes up as the purchasing power of the dollar goes down.  When the price of copper goes up it makes the nickel worth more than the face value because of the copper content.  Currently, like I stated earlier, the nickel is the only currency still being produced in this situation (material being worth more than face value).  I feel like I have really muddied the water and don’t know if I have gotten my point across, so I will attempt one last explanation.

The same thing I am talking about here with the nickel occurred with the coin currency in the past.  The pre-1964 silver coins became worth more than face value because of their metal content.  In 1965 the government changed the content of all the silver coinage and made it worth less than face value.  What happened next?  Everyone began hoarding the pre-1964 coins because of their metal content value.  It is said that bad money displaces good money (Gresham’s Law).  Meaning this:  In 1965 there were two kinds of quarters, one made of junk and the other made of silver, but both worth a FACE VALUE of $.25.  This caused people to keep the silver and not spend it when they could spend the junk and get the same value in the marketplace (the good money was displaced).

This is the case with the nickel today.  It is still made of real content (copper and nickel) and is the only coin that hasn’t been changed to junk…..YET.  The government is trying to phase out the current nickel and replace it with junk.  When they do, it will drive people to hoard the current nickel like the pre-64 coins because the new nickel will be made of junk.

As you look back through history, there has been a common theme amongst nations that devalue their currency by replacing it with junk. It has always caused a collapse of the currency and a return to real money (gold, silver, copper).

Now, I have made my point, or at least tried to, about copper and the value of the nickel.  Having said all of this, however, I am way heavier into silver and gold (SilverSaver.com), but feel that a small portion of capital put into rolls of nickels could pay off in the long run, especially if the government continues to devalue the currency and we see a rise in copper prices (both of which I think will happen).  I know it’s not the most standard or prestigious of investments but nickels may turn out to be worth a second look.

And one last note: People argue that it is illegal or impractical to melt down the coins (both true statements) but you wouldn’t have to melt down the nickels to realize the increased value of them.  They would simply trade at a premium much like the pre-64 coins do today.

I have included an article below that shows the government is wanting to change the content of the nickel.  Also included an article from economicpolicyjournal.com about Kyle Bass, the man who bought 20 million nickels.  These articles probably explain everything I’ve just stated better than me, but I gave it a try.

The Man Who Bought One Million Dollars Worth of Nickels

Kyle Bass has acquired one million dollars worth of nickels (20 million coins) because their value as scrap metal marginally exceeds their value as money. He obviously is expecting a strong price inflation that will boost the metal value of the coins much more. Which will result in their disappearing from general circulation, just like the 1932-1964 Washington quarters and the 1946-1964 Roosevelt dimes have. The metal value of the Washington quarter is now $5.89 and the Roosevelt dime melt value is $2.34.As recently as the early 1970s, both coins could be picked out of change. Quite an investment, with no downside risk! If price-inflation heats up, the nickel will provide the same type inflation protection hedge and, again, no downside. If there is no price inflation (unlikely) just spend the nickels.For the record, J. Kyle Bass is a Managing Partner and Principal at Hayman Capital Partners, LP. He also acts as a mortgage credit portfolio advisor to several other asset management firms and manages or advises over $4 billion of investments in the residential mortgage-backed securities market. Bass is also a Director of the Asset Backed Securities at Credit Derivatives Users Association.

Is The U.S. Mint Going To Change The Metal Content Of The Nickel?

Wednesday, March 9, 2011
Robert Wenzel

The current composition of the U.S. nickel is 25% nickel and 75% copper. It currently costs roughly 7 cents worth of this metal combination to make a nickel. Not a very profitable operation for the U.S. Mint. This may be change.

The United States Mint announced on Monday that it is requesting public comment from all interested persons on factors to be considered in conducting research for alternative metallic coinage materials for the production of all circulating coins.

According to the Mint:

These factors include, but are not limited to, the effect of new metallic coinage materials on the current suppliers of coinage materials; the acceptability of new metallic coinage materials, including physical, chemical, metallurgical and technical characteristics; metallic material, fabrication, minting, and distribution costs; metallic material availability and sources of raw metals; coinability; durability; sorting, handling, packaging and vending machines; appearance; risks to the environment and public safety; resistance to counterfeiting; commercial and public acceptance; and any other factors considered to be appropriate and in the public interest.

The United States Mint is not soliciting suggestions or recommendations on specific metallic coinage materials, and any such suggestions or recommendations will not be considered at this time. The United States Mint seeks public comment only on the factors to be considered in the research and evaluation of potential new metallic coinage materials. The Mint is a very slow bureaucratic machine, so nothing is going to happen this week, or even this year, but the day will come when the metallic content of the nickel is going to change.

In the meantime, as the Fed prints more and more money, the metal value of a nickel will continue to climb. At some point, nickels will disappear from general circulation just like the pre-1965 silver dimes and quarters have.

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5 Responses to Investing in Copper Bullion: Worth It or Not?

  1. Wow one million dollars of nickels! Wonder how many cubic feet that is?!

  2. Flint says:

    Your logic is great if the economy remains stable and there’s no additional wars. But there are going to be millions upon millions of people in this country who are not going to give a damn about American currency irregardless if it’s copper or silver if we go into “hyperinflation” mode. It will have to be melted down. The fact that U.S. currency is tanking so fast is going to give people an automatic “I’ll pass” on anything stamped with UNITED STATES of AMERICA on it. The smartest purchases are silver and copper in pure rounds, fractional as well as 1oz. These will be the bartering tools required to acquire goods and services that would have otherwise been procured using fiat currency. Coin collectors aren’t going to get anything but metal weight value on their precious coins in a situation like this.

  3. Cory says:

    http://www.usmint.gov/pressroom/index.cfm?action=press_release&ID=724. In 2006 the US government enacted an interim rule for 120 days that prevented the melting down and export of US nickels and pennies. If metal prices rise i would expect further regulations to be enacted. Which would make saving/investing in nickels pointless.

  4. robartrees says:

    Great post about copper investing. You saved me from Foolishness.

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