If I had A Nickel…

Ok kids – I’m going to let you in on another blockbuster trade.  This one is a slam dunk – principal protected, GUARANTEED not to lose money (in notional terms at least), and I’m not even kidding about that.  I debated writing about this, as Redhead Ted and I gave serious thought to putting this trade one, but perhaps one of my readers can suggest some logistical improvements that would make the trade possible.  Here goes:


Yep – I said it – United States Nickels – the 5c kind.  Like minded arbitrageurs already know that the U.S. Nickel (75% copper, 25% nickel) has more than 7 cents worth of metal in it at current copper prices.  A commenter on my blog noted this several weeks ago, pointing me toward a Michael Lewis interview.  Lewis asserted that one of the characters (rumored to be Michael Burry) in his book, The Big Short, had manged to purchase 20mm nickels, giving the justification “I like nickels,” when asked by the Fed why he wanted them.   I explained the trade to Redhead Ted, who immediately flew into a Pavlovian arbitrage-induced frenzy, getting another friend involved, and screaming at me on email “WE HAVE TO PUT THIS TRADE ON NOW! I WANT TO DO IT THIS WEEK!”

The Nickel Arb has some appealing characteristics:  1) You’re getting a 40%+ instant “profit” on the value of the metal: pay 5c, get 7c worth.  2) It’s principal protected. If the value of copper plummets, your nickel is still worth a nickel.  The only cost is your cost of carry – which in today’s ZIRP market, is very low, assuming you have uninvested cash on hand.  3) You have free upside: forget copper stocks or ETFs – you can buy actual copper at a discount via nickels!

The first problem with nickels, though, is that you need a lot of them.  A million nickels, a mere $50k worth, weighs almost 6 tons.   I’m sure one of my readers can do the math on how much space 1mm nickels takes up.  Then there’s the issue of procuring them.  Ted told me that he talked to a friend of a friend who said he could get us the nickels though.  We were seriously considering trying to do this, but I bailed for a key reason:  the logistical pain versus the lack of an exit plan.

See, the bigger problem is that  it’s illegal to melt down nickels for profit. So how do you get out of the trade?  I told Ted that it was a Greater Fool Trade – that the only way to sell these nickels was to find another schmuck who thought they were getting a bargain in metal value, and plug them with our 11,000 pounds of nickels.  Ted replied “coin collectors,” which made me laugh, even though he was serious.  Can you imagine trying to sell these things on EBAY?  One roll at a time?  His thesis was that as we bought up nickels, the US Government would adjust the composition of the nickel to make it cheaper and less valuable.  This, of course, would make our “old” copper nickels more “valuable” (from a hype and supply and demand perspective, at least) and more desirable.  There’s still the same problem though – how do you realize the value?

Readers will be aware that there is a liquid secondary market for older U.S. coinage with silver composition – but as far as I know, it is not illegal to melt these coins down, which is why they trade around their metallic intrinsic value.  If you can’t melt down the coins though (like the nickels), what kind of person would pay you a premium to their 5c face value for them?  Is my belief in rationality causing me to miss a slam dunk trade here in the Nickel Arb?

In the end, I told Ted, “If I could magically press a button and have this trade on, I’d absolutely do it.  However, given the headache in buying, transporting, storing, and then selling massive quantities of nickels, I think I’m going to skip it for now.”  But wait… that gives me an idea – there should be an ETF for this! The Kid Dynamite Physical Nickel ETF!

Run with it, readers… run with it.


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