Breaking news tonight from Brussels, as the ECB's and IMF's weekend of collusion and conspiracy have resulted in a nearly $1 Trillion total Eurozone bailout operation. The plan to ostensibly backstop the euro stands to leave US taxpayers on the hook for $50,083,000,000 in what will be another massive international transfer of wealth.
This plan is another, separate eurozone-orchestrated bailout operation that is independent of, and in addition to, the Greek bailout adopted on Friday. To recap the Greek bailout, on April 26, I wrote a post detailing the $3.417 Billion planned contribution from US taxpayers to the Greek bondholders on a then €45 Billion ECB-IMF bailout. Before that plan could even be finalized, it was more than doubled to €110 Billion, entailing a $6.834 Billion US-backed contribution, on May 2. This second ( €110 Billion) plan was finally approved by all eurozone nations on Friday, and the IMF cleared the way Saturday for its €30 Billion contribution (of which $6.834 will come from the US).
This €110 Billion Greek bailout, however, was just the tip of the iceburg. We now know that the ECB, the IMF, and the EU and EMU finance ministers have spent the weekend colluding in Brussels to hammer out an even more massive taxpayer-backed bailout. This time the package is not for the salvation a specific eurozone nation, but for the salvation the euro itself. Last week, the euro fell 4.1% against the dollar, the most since the 2008 collapse, including a huge beat-down on Thursday, May 6, during the euro-linked 998 DJIA plunge in New York. Check out this video series to watch the drama unfold.
And now today, Sunday, an announcement has come that the ECB and IMF have concocted an incredible €750 Billion ($962 Billion) plan to backstop the faltering euro currency and its "P-I-I-G-S" bankrupt member nations, even as the "G" (Greece) has already been awarded the €110 Billion. The latest bailout is basically Euro-TARP 2010--but even larger than the $700 Billion TARP plan approved by the US Congress on October 3, 2008. Also, instead of propping up the banks as TARP was supposed to do, this ECB-IMF program is clearly intended to prop up the euro and the eurozone nations themselves. It is, according to the Financial Times, an attempt to "Shock and Awe" the bond markets into confidence in the euro. Bloomberg reported the words of Marco Annunziata, chief economist at UniCredit, as:
“This is Shock and Awe, Part II and in 3-D,” “This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion.”
Oh, sure--a central bank just knows everything is going well when it has to "shock and awe" the markets into believing in its competency, its member solvency, and its currency. Confidence in the euro remains solidly mixed. As I write this, the euro has rallied off the latest news of the huge backstop to over $1.29, from a 14-month low of under $1.26 on Thursday. Still, bets against the euro reached yet another record level on Friday, May 7, even after the Greek package was approved. A "bank funding crunch" has meanwhile developed, which is increasing both the cost of interbank lending and the reluctance of banks so to lend. Currently, interbank credit in Europe is the tightest and most fragile it has been since the collapse of Lehman Brothers in September 2008, when the bankruptcy cut the interbank liquidity strings and snapped lending to a standstill. The ECB-IMF plan announced is intended to protect the euro at any cost--starting at about $1 Trillion. From the latest Bloomberg article posted just hours ago:
"European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.
"Jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance worth as much as 750 billion euros ($962 billion) to countries under attack from speculators. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt.
“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after the 14-hour meeting.
"Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that the show of financial force would prevent a sovereign-debt crisis and muffle speculation that the 11-year-old euro might break apart."
The $962 Billion plan makes it very clear that the ECB and IMF will take whatever desperate, confiscatory measures necessary to prevent the markets from ripping the euro to shreds, even without the consent or concurrence of the people of the eurozone nations to whom the bill will be addressed. The plan even includes monetizing the debt of member nations through support of bond auctions, and even intervention to the secondary bond markets to control the price of traded debt through the central-bank purchase of debt, if necessary. Considering this last point, you should not be surprised that the Federal Reserve is helping.
US cost, Federal Reserve involvement
Included in the ECB-IMF plan is a staggering €250 Billion ($324 Billion) from the IMF. With a 17% stake, the US contribution to save the euro, monetize debt, and otherwise intervene in the bond markets will therefore be €42.5 Billion, or over $50 Billion (at the current 1.295 conversion rate).
Additionally, the Federal Reserve has re-opened the euro-dollar swap facility. This special facility was created during the crisis to fund the demand for dollars internationally during the crunch, and all lines were closed in February 2010. Now, months later and at the request of the ECB and IMF, the Mr Bernanke has agreed to re-open the swap lines. Euro-dollar swaps are agreements between the Federal Reserve and ECB to exchange currencies with the obligation to reverse the transaction in the future; the ECB then sells the dollars to European banks, and the Federal Reserve either sells the euros or holds them. The agreement entangles the dollar in this euro mess even more than it already is, and is meant to decrease the pressure on euro in dollar terms, as banks can have assured access to dollars through the ECB's swap at a certain price. The agreement will allow the ECB to sell unlimited amounts of US dollars.
The ECB might receive more help from the Federal Reserve--not in the form of more swaps, but in the form of advice. The ECB today announced that it too will pursue the path of monetization of debt, a path well-pounded by the the Federal Reserve. Just as the Federal Reserve has recently (they claim) completed the "buying" at least $300 Billion in US Treasuries from auctions and secondary markets, the ECB will soon embark upon a monetization of euro debt in an attempt to keep the yields low and the price of financing within reach of the over-extended eurozone nations such as Greece, Spain, Italy, Ireland, and Portgual. As last week's routing demonstrated, lenders to these eurozone nations are currently demanding a serious premium in return for buying what the market considers risky debt.
This weekend's developements cast an even more suspicious angle on the market plunge we witnessed on Thursday. Like everyone else, I'm still investigating that day. I've already noticed the similarities between October 1, 2008 and May 6, 2010, as I'm sure you have too. I've noticed the difference is TARP in 2008 and euro in 2010. This $962 Billion bombshell makes these similarities even more suspicious. I wonder if the phrase "martial law" surfaced in Brussells this weekend as it did in Washington in 2008.
I won't be surprised it if did.
Showing posts with label federal reserve. Show all posts
Showing posts with label federal reserve. Show all posts
Sunday, May 9, 2010
Wednesday, December 30, 2009
Penny Arbitrage, the US Dollar, and the Commodities Market
Question: When is a penny worth more than a penny?
Answer: When there’s the chance for penny arbitrage.
Arbitrage is any investor’s dream come true! It is an opportunity to make money through a trade with zero risk of a loss. Literally: in an arbitrage situation, you cannot lose. If you can, then its not true arbitrage. While this may sound too good to be true, arbitrage is quite possible, and there is an entire niche of specialized investors who are constantly hunting down the latest chance to taken advantage of it. Arbitrage is an idiosyncrasy of the free market: as much as it might burn some people who don’t take advantage of it—including “people” of the international finance realm like those are the BIS, IMF, etc—arbitrage reveals locality in pricing over global uniformity. Therefore, of course, globalists hate arbitrage, because that locality threatens the centralized world they seek to unilaterally control. Here’s the IMF’s explanation of arbitrage, from Demystifing Hedge Funds, an external document on the IMF's website:
"The technique of arbitrage tries to profit from the fact that sometimes an asset trades at a different price in different markets at the same time. Because an asset should have the same price in all markets at the same time, a way to capture a low-risk profit is to sell the higher-priced asset in one market (sell it short) and buy the lower-priced asset (buy it long) in the other market. When the prices converge, an arbitrage profit can be captured by selling the formerly low-priced asset and buying back the formerly high-priced asset. A typical example of potential arbitrage opportunities is company bonds that are convertible into equity shares of the company.”
Please note, by “asset,” the authors are talking about financial assets—market-traded securities, stocks, debt, derivatives, etc—and not off-exchange commodities. Commodities often have different prices in different geographic areas: bananas are cheaper in Guatemala than in Russia, right? The availability of a commodity is often geographically limited or specific, thus the above-mentioned “assets” are those electronically exchanged paper assets which are equally accessible in all corners of the planet. Indeed, commodities can be lsited on exchanges, and when they are, they also be subject to price uniformity, and possibily arbitrage when locality breaks that uniformity. Just recently, a major arbitrage oppurtunity occured for Chinese copper traders who spotted a price difference between the London Metals Exchange (LME) price and the Shanghai price on futures contracts for copper: within hours, these savvy traders rallied the price up and pocketed a risk-free return. And of course, they never even touched the metal. It is pure arbitrage.
Arbitrage is not Chiquita buying bananas in Guatemala for $0.02/lbs, bringing them to the US, and selling them for $0.69/lbs. Chiquita is not conducting arbitrage because, while if everything goes well, they’ll make a nice profit, it is also possible that they could lose money. True arbitrage is totally protected from loss. Chiquita is trading: they are moving the cheap-to-produce, widely available, local commodity of bananas from a place like Guatemala to a higher-priced market where the bananas are otherwise unavailable, like Minnesota. Chiquita takes a risk and could lose: after all, the banana ship could get raided by gorilla pirates (not guerillas, but actual gorillas!), who eat all the bananas, kill the crew, and sink the ship. Its not likely, but its possible, and now Chiquita is out a load of bananas, a crew, and a ship. Therefore, there is risk to Chiquita’s venture, and so it is not arbitrage. Remember: arbitrage carries zero risk—it must be impossible to lose. Also, true arbitrage happens nearly instantly: the trade is executed and the profit is collected. So, then, what is an example of arbitrage, and how to pennies relate to this?
Think about pennies while this example of arbitrage unfolds. Probably the simplest, easiest, and most common form of arbitrage happens when a trader realizes that the convertible bonds (bonds of a company that can be converted to stock in that same company) have a premium (or discount) to the current price of the equity (stock). This is called convertible arbitrage. Demystifing Hedge Funds explains it as:
“Convertible arbitrage. A strategy in which managers purchase a portfolio of securities that are convertible into other kinds of securities. For example, corporate bonds are often convertible into equity shares of the issuing companies. Normally, the prices of the bonds and shares trade in a close relationship. Sometimes bond and stock market conditions cause the prices to get out of line. Hedge funds buy and sell the bonds and stocks simultaneously, pushing the prices back into line and profiting from market mispricing."
Let’s say you are a trader. You are looking through convertible bonds, and notice that Company Z’s stock is trading at $10 a share. You also notice, however, that for some reason, Company Z’s convertible bonds are trading at 99% of face value, and are convertible to 11 shares. You do the math: you can buy $100 face value of Company Z’s bonds for $99, and it convert to 11 shares at $10 a share. In other words, you can buy spend $99 and get $110, instantly. You don’t know anything about Company Z, nor do you particularly care, because you will execute the buy and sell of the bonds and converted stocks instantly and simultaneously. Others, of course, will quickly notice this, and soon those with the bonds which you seek to purchase will demand a higher price (or convert the bonds to stocks themselves), and/or those with the stock you wish to buy will sell and buys bonds, thus driving down the price of the stock. Either way, the arbitrage will quickly evaporate, as the bond price will go lower or the stock price will go higher to equalize, or the stock will go higher and the bonds lower. Either way, those others in the market with Company Z bonds/stocks will have the market power to demand a higher price which will correct the arbitrage situations.
So, in convertible arbitrage the trader exercises the right to convert one to the other, or use one to purchase the other at a zero risk of loss. It must be instantaneously, electronically accomplished so that the arbitrager never “holds” the bonds/stocks, which will soon be subject to correction. The other huge example (though much less common) version is regulatory arbitrage. In regulatory arbitrage, traders can take advantage of some legal constraint that varies in different markets. Regulatory arbitrage plays one government’s policies against another, or with Basel II, one securitization framework against the other. There are financial geniuses in the regulatory arbitrage market, who have, as mere individuals, actually greatly hampered the Bank for International Settlements’ push for “standardisation” by revealing that the BIS’ Basel II framework itself is wrought with contradictions and arbitrage opportunities—and they are using it against the banks with great success. And banks themselves use regulatory arbitrage. Regulatory arbitrage along these lines, according to many analysts and the disgruntled finance ministers of the top twenty economies (aka the G20), had a significant role in sparking the current meltdown, particularly and specifically with the Basel II minimum capital requirement’s various ridiculous “capital calculation” schemes. (But I’m getting sidetracked: there will be a complete post on the role of regulatory arbitrage in Basel II soon.) So, that’s basic financial asset arbitrage. It’s a simple concept, even though the execution can be a little complex, and arbitrage helps keep prices of financial assets in line throughout the global paper investment market.
Thus is one example of paper asset arbitrage. Now for commodities arbitrage—penny arbitrage. I acknowledge outright that my penny arbitrage example is in no way a true arbitrage, because you cannot instantly make profits nor can you execute it while sitting behind a trader screen. To be totally technical, penny “arbitrage” is more like a hedge, as one “asset” (the penny) exposes the holder to two different markets simultaneously—the copper market (as a copper penny) and the currency market (as a unit of the US dollar). But unlike hedging, it actually carries zero risk--you'll always have whatever you started with. Therefore, I’m going to call it penny arbitrage, and maybe you’ll see why and agree.
Penny arbitrage demonstrates what fiat money does: it disintegrates value. Reach into your pocket, and pull out all of the change. Of course, we already know that any pre-1965 quarters or dimes that you might have in that mix are 90% silver, and therefore, currently, those silver coins are worth more than ten times the face value (in fact, with silver at about $17/oz today, they’re worth over twelve times face value). But, in all honesty, it is not very likely that you’ll have a pre-1965 quarter or dime. Most of the silver coins have been pulled from circulation by investors and collectors who know what they are worth, and so you’ll have to pay the about $12.29 for 4 silver quarters (in other words, $12.29 for $1 face value). That said, however, it is very likely that you’ll have some pennies. And it is also very likely that you’ll have some copper pennies.
So, do it now, check your pennies: any one with a date of 1981 or older is a 95% copper coin. During 1982, the penny’s composition was changed from 95% copper, 5% zinc to 95% zinc, and only 5% copper (coating), due to the increasing price of copper, which had peaked to over $1/lb in 1980, and was holding steady above $0.70/lb. (Do you see where this is going yet?) Some 1982 pennies are 95% copper, and some are 95% zinc, but you cannot easily tell unless you weigh them: the copper pennies weigh about 3.1 gm, and the zinc pennies weigh about 2.5 gm. Of course, the price of copper wasn’t simply increasing on its own in a vacuum as industrial commodity: the price of copper was increasing relative to the value of the dollar (or, in this case, the penny), which, because of its inflationary fiat nature, is constantly deteriorating. Congress changed the composition of pennies in 1982 because the cost of making the physical coins was increasing, while the purchasing power value of each $0.01 was decreasing.
Now for the arbitrage: those easy-to-find copper pennies have a declared face value of $0.01. Therefore, for monetary exchange, a penny (whether copper or not) is worth only $0.01. But, as copper, your little penny exposes you to the commodities market, and as metal, the little thing is worth more that double the face value—its actually worth a whopping $0.02 (or 0.0217498, to be more precise, today, Dec 30 2009, with copper at $3.35/lb). That is penny arbitrage.
As stated above, the mass of a copper penny is 3.1 grams, but as it is 95% copper, the actual copper content is 95% x 3.1 = 2.945 grams. There are 28.35 grams to an ounce (metric converter), and 16 ounces to a pound, therefore 453.6 gm/lb. So, to calculate the price per gram of copper, simply convert the price/lb to price/gm by following this equation:
Price/lb ÷ 453.6 = Price/gm
At $3.35/lb, copper is currently $0.0073853 a gram. At 95% copper, each copper penny contains 2.945 gm copper. Therefore, multiply the price by the content weight, and you’ll see that each copper penny contains $0.0217498 worth of copper, or more than twice the face value.
An easier way to do this is to calculate the number of copper pennies needed to make a pound of copper. Copper pennies are 95% copper and lose very little of their composition through circulation.
Number of 95% copper pennies needed to make 1 lb copper:
453.6 (gm in 1lb of copper) ÷ 2.945 (gm of copper in 1 penny) = 154.023 pennies.
So, you need 155 pennies (or $1.55) to have one pound worth of copper. Of course, as they are 5% zinc, these 155 pennies will actually weigh slightly more than one pound if placed on a scale (they'll weigh 3.1 gm x 155 = 480.5 gm / 453.6 gm (per pound) = 1.059 lbs).
Now, consider that the current price per lb of copper is $3.35 (Dec 30 2009). Do you get it now?
Answer: When there’s the chance for penny arbitrage.
Arbitrage is any investor’s dream come true! It is an opportunity to make money through a trade with zero risk of a loss. Literally: in an arbitrage situation, you cannot lose. If you can, then its not true arbitrage. While this may sound too good to be true, arbitrage is quite possible, and there is an entire niche of specialized investors who are constantly hunting down the latest chance to taken advantage of it. Arbitrage is an idiosyncrasy of the free market: as much as it might burn some people who don’t take advantage of it—including “people” of the international finance realm like those are the BIS, IMF, etc—arbitrage reveals locality in pricing over global uniformity. Therefore, of course, globalists hate arbitrage, because that locality threatens the centralized world they seek to unilaterally control. Here’s the IMF’s explanation of arbitrage, from Demystifing Hedge Funds, an external document on the IMF's website:
"The technique of arbitrage tries to profit from the fact that sometimes an asset trades at a different price in different markets at the same time. Because an asset should have the same price in all markets at the same time, a way to capture a low-risk profit is to sell the higher-priced asset in one market (sell it short) and buy the lower-priced asset (buy it long) in the other market. When the prices converge, an arbitrage profit can be captured by selling the formerly low-priced asset and buying back the formerly high-priced asset. A typical example of potential arbitrage opportunities is company bonds that are convertible into equity shares of the company.”
Please note, by “asset,” the authors are talking about financial assets—market-traded securities, stocks, debt, derivatives, etc—and not off-exchange commodities. Commodities often have different prices in different geographic areas: bananas are cheaper in Guatemala than in Russia, right? The availability of a commodity is often geographically limited or specific, thus the above-mentioned “assets” are those electronically exchanged paper assets which are equally accessible in all corners of the planet. Indeed, commodities can be lsited on exchanges, and when they are, they also be subject to price uniformity, and possibily arbitrage when locality breaks that uniformity. Just recently, a major arbitrage oppurtunity occured for Chinese copper traders who spotted a price difference between the London Metals Exchange (LME) price and the Shanghai price on futures contracts for copper: within hours, these savvy traders rallied the price up and pocketed a risk-free return. And of course, they never even touched the metal. It is pure arbitrage.
Arbitrage is not Chiquita buying bananas in Guatemala for $0.02/lbs, bringing them to the US, and selling them for $0.69/lbs. Chiquita is not conducting arbitrage because, while if everything goes well, they’ll make a nice profit, it is also possible that they could lose money. True arbitrage is totally protected from loss. Chiquita is trading: they are moving the cheap-to-produce, widely available, local commodity of bananas from a place like Guatemala to a higher-priced market where the bananas are otherwise unavailable, like Minnesota. Chiquita takes a risk and could lose: after all, the banana ship could get raided by gorilla pirates (not guerillas, but actual gorillas!), who eat all the bananas, kill the crew, and sink the ship. Its not likely, but its possible, and now Chiquita is out a load of bananas, a crew, and a ship. Therefore, there is risk to Chiquita’s venture, and so it is not arbitrage. Remember: arbitrage carries zero risk—it must be impossible to lose. Also, true arbitrage happens nearly instantly: the trade is executed and the profit is collected. So, then, what is an example of arbitrage, and how to pennies relate to this?
Think about pennies while this example of arbitrage unfolds. Probably the simplest, easiest, and most common form of arbitrage happens when a trader realizes that the convertible bonds (bonds of a company that can be converted to stock in that same company) have a premium (or discount) to the current price of the equity (stock). This is called convertible arbitrage. Demystifing Hedge Funds explains it as:
“Convertible arbitrage. A strategy in which managers purchase a portfolio of securities that are convertible into other kinds of securities. For example, corporate bonds are often convertible into equity shares of the issuing companies. Normally, the prices of the bonds and shares trade in a close relationship. Sometimes bond and stock market conditions cause the prices to get out of line. Hedge funds buy and sell the bonds and stocks simultaneously, pushing the prices back into line and profiting from market mispricing."
Let’s say you are a trader. You are looking through convertible bonds, and notice that Company Z’s stock is trading at $10 a share. You also notice, however, that for some reason, Company Z’s convertible bonds are trading at 99% of face value, and are convertible to 11 shares. You do the math: you can buy $100 face value of Company Z’s bonds for $99, and it convert to 11 shares at $10 a share. In other words, you can buy spend $99 and get $110, instantly. You don’t know anything about Company Z, nor do you particularly care, because you will execute the buy and sell of the bonds and converted stocks instantly and simultaneously. Others, of course, will quickly notice this, and soon those with the bonds which you seek to purchase will demand a higher price (or convert the bonds to stocks themselves), and/or those with the stock you wish to buy will sell and buys bonds, thus driving down the price of the stock. Either way, the arbitrage will quickly evaporate, as the bond price will go lower or the stock price will go higher to equalize, or the stock will go higher and the bonds lower. Either way, those others in the market with Company Z bonds/stocks will have the market power to demand a higher price which will correct the arbitrage situations.
So, in convertible arbitrage the trader exercises the right to convert one to the other, or use one to purchase the other at a zero risk of loss. It must be instantaneously, electronically accomplished so that the arbitrager never “holds” the bonds/stocks, which will soon be subject to correction. The other huge example (though much less common) version is regulatory arbitrage. In regulatory arbitrage, traders can take advantage of some legal constraint that varies in different markets. Regulatory arbitrage plays one government’s policies against another, or with Basel II, one securitization framework against the other. There are financial geniuses in the regulatory arbitrage market, who have, as mere individuals, actually greatly hampered the Bank for International Settlements’ push for “standardisation” by revealing that the BIS’ Basel II framework itself is wrought with contradictions and arbitrage opportunities—and they are using it against the banks with great success. And banks themselves use regulatory arbitrage. Regulatory arbitrage along these lines, according to many analysts and the disgruntled finance ministers of the top twenty economies (aka the G20), had a significant role in sparking the current meltdown, particularly and specifically with the Basel II minimum capital requirement’s various ridiculous “capital calculation” schemes. (But I’m getting sidetracked: there will be a complete post on the role of regulatory arbitrage in Basel II soon.) So, that’s basic financial asset arbitrage. It’s a simple concept, even though the execution can be a little complex, and arbitrage helps keep prices of financial assets in line throughout the global paper investment market.
Thus is one example of paper asset arbitrage. Now for commodities arbitrage—penny arbitrage. I acknowledge outright that my penny arbitrage example is in no way a true arbitrage, because you cannot instantly make profits nor can you execute it while sitting behind a trader screen. To be totally technical, penny “arbitrage” is more like a hedge, as one “asset” (the penny) exposes the holder to two different markets simultaneously—the copper market (as a copper penny) and the currency market (as a unit of the US dollar). But unlike hedging, it actually carries zero risk--you'll always have whatever you started with. Therefore, I’m going to call it penny arbitrage, and maybe you’ll see why and agree.
Penny arbitrage demonstrates what fiat money does: it disintegrates value. Reach into your pocket, and pull out all of the change. Of course, we already know that any pre-1965 quarters or dimes that you might have in that mix are 90% silver, and therefore, currently, those silver coins are worth more than ten times the face value (in fact, with silver at about $17/oz today, they’re worth over twelve times face value). But, in all honesty, it is not very likely that you’ll have a pre-1965 quarter or dime. Most of the silver coins have been pulled from circulation by investors and collectors who know what they are worth, and so you’ll have to pay the about $12.29 for 4 silver quarters (in other words, $12.29 for $1 face value). That said, however, it is very likely that you’ll have some pennies. And it is also very likely that you’ll have some copper pennies.
So, do it now, check your pennies: any one with a date of 1981 or older is a 95% copper coin. During 1982, the penny’s composition was changed from 95% copper, 5% zinc to 95% zinc, and only 5% copper (coating), due to the increasing price of copper, which had peaked to over $1/lb in 1980, and was holding steady above $0.70/lb. (Do you see where this is going yet?) Some 1982 pennies are 95% copper, and some are 95% zinc, but you cannot easily tell unless you weigh them: the copper pennies weigh about 3.1 gm, and the zinc pennies weigh about 2.5 gm. Of course, the price of copper wasn’t simply increasing on its own in a vacuum as industrial commodity: the price of copper was increasing relative to the value of the dollar (or, in this case, the penny), which, because of its inflationary fiat nature, is constantly deteriorating. Congress changed the composition of pennies in 1982 because the cost of making the physical coins was increasing, while the purchasing power value of each $0.01 was decreasing.
Now for the arbitrage: those easy-to-find copper pennies have a declared face value of $0.01. Therefore, for monetary exchange, a penny (whether copper or not) is worth only $0.01. But, as copper, your little penny exposes you to the commodities market, and as metal, the little thing is worth more that double the face value—its actually worth a whopping $0.02 (or 0.0217498, to be more precise, today, Dec 30 2009, with copper at $3.35/lb). That is penny arbitrage.
As stated above, the mass of a copper penny is 3.1 grams, but as it is 95% copper, the actual copper content is 95% x 3.1 = 2.945 grams. There are 28.35 grams to an ounce (metric converter), and 16 ounces to a pound, therefore 453.6 gm/lb. So, to calculate the price per gram of copper, simply convert the price/lb to price/gm by following this equation:
Price/lb ÷ 453.6 = Price/gm
At $3.35/lb, copper is currently $0.0073853 a gram. At 95% copper, each copper penny contains 2.945 gm copper. Therefore, multiply the price by the content weight, and you’ll see that each copper penny contains $0.0217498 worth of copper, or more than twice the face value.
An easier way to do this is to calculate the number of copper pennies needed to make a pound of copper. Copper pennies are 95% copper and lose very little of their composition through circulation.
Number of 95% copper pennies needed to make 1 lb copper:
453.6 (gm in 1lb of copper) ÷ 2.945 (gm of copper in 1 penny) = 154.023 pennies.
So, you need 155 pennies (or $1.55) to have one pound worth of copper. Of course, as they are 5% zinc, these 155 pennies will actually weigh slightly more than one pound if placed on a scale (they'll weigh 3.1 gm x 155 = 480.5 gm / 453.6 gm (per pound) = 1.059 lbs).
Now, consider that the current price per lb of copper is $3.35 (Dec 30 2009). Do you get it now?
As the table above demonstrates, the price of copper overwhelms the one-cent face value of the penny when the metal hit $1.55/lb. A copper penny will be worth a dime ($0.10) when copper hits $15.41/lb.
For historical comparison, the Treasury could no longer afford to maintain the 90% silver content of halves, quarters, and dimes by 1962. The value of the paper dollar had decreased (read: "had been debased by the Federal Reserve System") to the level that silver was nearing a 1:1 ratio. The year 1964 was the last for 90% silver coins (40% silver halves through 1968, and then all circulating coins were silver-free). Since 1965, when silver traded at roughly $1.10 - 1.29/oz, the price of silver has increased by approximately $16.90, or 1536% (based on recent $18/oz silver; silver is today at about $17, and reached over $20 in early 2008).
Likewise, since gold was removed from the $35/oz peg in 1971, the metal has moved $1065, or 3043% (based on recent approximate $1,100/oz gold).
Therefore, as a monetary unit, a copper penny (and its zinc version) is pegged at $0.01, which sets both the floor value and the investment price for it as an “arbitrage” opportunity. However, as a piece of metal, the old copper penny’s value is over 2 cents. Over the long term, the copper price will likely rise in step with general prices, especially as the industrial demand for copper increases and more nations become industrialized, but an even greater factor in the “price” of copper will be the long-term loss of value of the US dollar unit.
I’ll be the first to declare that copper prices are very volatile: after a 60-year low of $0.60/lb in the 1990’s, copper has spent much of the last 15 years under $1.50/lb, which made the price nearly the same as the $1.55/lb copper-penny price. In 2006, the price of copper and nickel surged, making the coins more valuable as metal than as US currency, and forcing high replacement costs on the US Mint. Until 2006, it was not illegal to melt coins, but facing these high replacement costs, the Treasury prompted the US government to illegalize the melting of pennies and nickels (which are 75% copper, 25% nickel), and impose restrictions on the export of the coins to $100 face value. The copper price moved down in 2007 before again surging during the summer 2008 commodities bubble that pushed oil to $148/barrel. The melt/export ban remains in place for nickels and pennies. (A similar ban was placed on the melting of silver coins as part of the Coinage Act in 1967, and this ban was eventually lifted once the Mint could meet the US coin demand with the “clad” silver-free coins.)
At the 2006 and 2008 $4/lb level, $1.00 in copper pennies was actually worth $2.60 in copper. For the record: I am absolutely NOT suggesting to anyone to melt pennies or nickels—as detailed above, it is a federal crime punishable by a $10,000 fine and five years in prison, or both. I am simply using the difference in the “currency value” of copper pennies versus the “commodities value” of the copper in them to demonstrate what fiat money does to the value of our currency and the spending power of our savings.
So think about what the Federal Reserve’s fiat printing machine is doing to your savings next time you have a little copper penny in your hand. It is not rocket science, and it is not some crazy derivative: a dollar in paper, or as an electronic entry at your bank, is worth $1.00, period. Yet, a dollar in little copper pennies is currently worth $2.17. This is why we call the central bankers by their proper name: central banksters.
Perhaps anyone with electronic “cash” sitting in an account, or paper bills stuffed under a mattress, collecting zero or near zero percent interest should, maybe, think about turning all that savings into pennies, sorting through them, and filling up Arrowhead water jugs with the coppers! Hey--it can be a new home decorating item: a few thousand pounds of copper pennies in whatever will hold them! After all, it really doesn’t take up that much space: according to a very unscientific Google search, a 5-gallon Arrowhead jug filled with copper pennies would weigh about 245 lbs, and contain 35,000 pennies, or about $350 face value in pennies, with a copper content of 95%. Put it in the closet, and when copper is at $10/lb in 15 years, it will be worth $2275, or $1,925 more than the face value. Worst case scenario, the police-state raids your house, takes your pennies, and gives you Federal Reserve notes!
Left as electronic money in a savings account at 5% compounding interest (which you’d be lucky to find these days), that $350 will have grown to just $570 in 10 years (calculator). Left as cash in an envelope, it will remain at $350, and simply further lose purchasing power as the dollar devalues. Considering this, pennies are looking better by the minute! Plus, there’s the added benefit of denying a banking institution from taking your $350 and leveraging it out at 10:1, "buying" up the economy, further contributing to inflation, strengthening the Federal Reserve System, and continuing the devaluation of the dollar and atrophy of spending power! Why not pennies?
In 1924, in the Weimar Republic, paper money was worth more as fuel for the fire than currency; in 2009, in Mugabe’s Zimbabwe, a $1,000,000,000,000 (that's one TRILLION) in bank notes was used as wall paper. And today, a little old US penny is worth more as metal than as currency. We’re lucky..,but for how long?
For historical comparison, the Treasury could no longer afford to maintain the 90% silver content of halves, quarters, and dimes by 1962. The value of the paper dollar had decreased (read: "had been debased by the Federal Reserve System") to the level that silver was nearing a 1:1 ratio. The year 1964 was the last for 90% silver coins (40% silver halves through 1968, and then all circulating coins were silver-free). Since 1965, when silver traded at roughly $1.10 - 1.29/oz, the price of silver has increased by approximately $16.90, or 1536% (based on recent $18/oz silver; silver is today at about $17, and reached over $20 in early 2008).
Likewise, since gold was removed from the $35/oz peg in 1971, the metal has moved $1065, or 3043% (based on recent approximate $1,100/oz gold).
Therefore, as a monetary unit, a copper penny (and its zinc version) is pegged at $0.01, which sets both the floor value and the investment price for it as an “arbitrage” opportunity. However, as a piece of metal, the old copper penny’s value is over 2 cents. Over the long term, the copper price will likely rise in step with general prices, especially as the industrial demand for copper increases and more nations become industrialized, but an even greater factor in the “price” of copper will be the long-term loss of value of the US dollar unit.
I’ll be the first to declare that copper prices are very volatile: after a 60-year low of $0.60/lb in the 1990’s, copper has spent much of the last 15 years under $1.50/lb, which made the price nearly the same as the $1.55/lb copper-penny price. In 2006, the price of copper and nickel surged, making the coins more valuable as metal than as US currency, and forcing high replacement costs on the US Mint. Until 2006, it was not illegal to melt coins, but facing these high replacement costs, the Treasury prompted the US government to illegalize the melting of pennies and nickels (which are 75% copper, 25% nickel), and impose restrictions on the export of the coins to $100 face value. The copper price moved down in 2007 before again surging during the summer 2008 commodities bubble that pushed oil to $148/barrel. The melt/export ban remains in place for nickels and pennies. (A similar ban was placed on the melting of silver coins as part of the Coinage Act in 1967, and this ban was eventually lifted once the Mint could meet the US coin demand with the “clad” silver-free coins.)
At the 2006 and 2008 $4/lb level, $1.00 in copper pennies was actually worth $2.60 in copper. For the record: I am absolutely NOT suggesting to anyone to melt pennies or nickels—as detailed above, it is a federal crime punishable by a $10,000 fine and five years in prison, or both. I am simply using the difference in the “currency value” of copper pennies versus the “commodities value” of the copper in them to demonstrate what fiat money does to the value of our currency and the spending power of our savings.
So think about what the Federal Reserve’s fiat printing machine is doing to your savings next time you have a little copper penny in your hand. It is not rocket science, and it is not some crazy derivative: a dollar in paper, or as an electronic entry at your bank, is worth $1.00, period. Yet, a dollar in little copper pennies is currently worth $2.17. This is why we call the central bankers by their proper name: central banksters.
Perhaps anyone with electronic “cash” sitting in an account, or paper bills stuffed under a mattress, collecting zero or near zero percent interest should, maybe, think about turning all that savings into pennies, sorting through them, and filling up Arrowhead water jugs with the coppers! Hey--it can be a new home decorating item: a few thousand pounds of copper pennies in whatever will hold them! After all, it really doesn’t take up that much space: according to a very unscientific Google search, a 5-gallon Arrowhead jug filled with copper pennies would weigh about 245 lbs, and contain 35,000 pennies, or about $350 face value in pennies, with a copper content of 95%. Put it in the closet, and when copper is at $10/lb in 15 years, it will be worth $2275, or $1,925 more than the face value. Worst case scenario, the police-state raids your house, takes your pennies, and gives you Federal Reserve notes!
Left as electronic money in a savings account at 5% compounding interest (which you’d be lucky to find these days), that $350 will have grown to just $570 in 10 years (calculator). Left as cash in an envelope, it will remain at $350, and simply further lose purchasing power as the dollar devalues. Considering this, pennies are looking better by the minute! Plus, there’s the added benefit of denying a banking institution from taking your $350 and leveraging it out at 10:1, "buying" up the economy, further contributing to inflation, strengthening the Federal Reserve System, and continuing the devaluation of the dollar and atrophy of spending power! Why not pennies?
In 1924, in the Weimar Republic, paper money was worth more as fuel for the fire than currency; in 2009, in Mugabe’s Zimbabwe, a $1,000,000,000,000 (that's one TRILLION) in bank notes was used as wall paper. And today, a little old US penny is worth more as metal than as currency. We’re lucky..,but for how long?
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