We Have Meltdown
By Ned W. Schmidt CFA,CEBS
May 1, 2006
Around the world, investors are shedding their national monies and moving to Gold. Quite simply, they have higher faith in Gold than that money produced by their governments. Gold, neither managed by a central bank nor a liability of a government, has been and continues to be the money in which investors have higher faith. Little wonder with the record of governments and their debt money that Gold is moving toward a new long-term high dollar price as it moves in a greater bull market to more than US$1,300.
So, how do you know when your country's money is not worth much?
A. Moneychanger at airport in small country laughs at you.
B. Restrooms have money changers to convert 20s into 1s.
C. Sign in restaurant says, "Checks only!"
D. When scrap dealers are melting down the coins.
For some time Gold bugs and writers on the merits of Gold have been critical of Federal Reserve policies and the spendthrift ways of the U.S. government. We have written till our fingers hurt that the value of the money would be destroyed. Even US$650 Gold is ignored by the inbred group of economists running Washington. The latest run in Gold to a high was brought about by the testimony of Chairman Bernanke. Global money markets are voting, thumbs down on Federal Reserve policy and thumbs up on Gold
The answer to the big question above is D. The scrap dealers are about to have a new line of business, melting down U.S. pennies, US$0.01 coins. The U.S. government, and most others, debased their national monies many decades ago. The ultimate debasement was when paper money was forced on the citizens. We still have, though, some metal coins to at least preserve some semblance of national dignity. What respectable nation would have all denominations of money in paper form?
Many of us can remember back to when the copper penney became a historical relic. Diligent workers at the U.S. mints conjured up a new mix of copper and zinc for the lowly penney. The purpose of that action was to destroy any remaining intrinsic value of the coin. Such a move would prevent the melting down of the copper pennies for the copper in them. Presumably once done with that deed, they went on to reformulate the consumer price indices. However, global demand for commodities in a world with surplus dollars has caused price relationships to adjust once again.
As Graph One shows, the meltdown value for U.S. pennies is fast approaching. Yes, for simplicity we are ignoring smelting and other costs. More importantly though, we are looking at the intrinsic value of the U.S. one cent piece. Will it be worth more as scrap metal or as money? And is this development an omen of the future value of other denominations of U.S. money?
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