Economist JP Koning recently blogged about speculation in the value of a hoard of U.S. five-cent coins, the lowly nickel. Here's an excerpt.
In 2011, hedge fund manager Kyle Bass reportedly bought $1 million worth of nickels. Why on earth would anyone want to own 20 million
nickels? Let's work out the underlying logic of this trade.
A nickel weighs five grams, 75% of which is copper and the rest is nickel. At the time that Bass bought his nickels, the actual metal content of
each coin was worth around 6.8 cents. So Bass was buying 6.8 cents for 5 cents, or $1.36 million worth of base metals for just $1 million.
To realize this 6.8 cents, Bass would have to sell the copper and nickel as metal, not coin. But liberating the actual metal from each
token isn't so easy. Since 2006 it's been illegal to melt pennies and nickels down. As a regulated hedge fund manager, Bass probably
isn't willing to break the law. Which means he'd only be able to realize the metal content of nickels indirectly, by on-selling them to a
buyer who is willing take on the risks of melting nickels. That wouldn't be me, mind you. Five years in jail sounds like a long time.
At the right price, would-be smelterers will surely emerge out of the woodwork to buy Bass's stash. Say the prices of nickel and copper
explode such that a nickel now contains 20 cents worth of metal. Bass should have no problems finding someone who'd pay him 12-15 cents for each
of his nickels. Bass wouldn't be doing anything illegal, he'd just be selling nickels on to a stranger at a premium. And given that he only
paid face value for each nickel, he'd be more than doubling his bet.
So Bass has upside exposure to the next bull market in copper and nickel prices. The neat part of this trade is that he has no downside exposure.
That's because a nickel can never be worth less than its face value of five cents.
Of course, hauling, storing and shipping all those nickels takes time and money, too, and Koning goes on to investigate that. Interesting reading.
Check out the complete article at the link below. -Editor
To read the complete article, see:
Kyle Bass's big nickel bet
Wayne Homren, Editor
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