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Want a Potential 36% Return? Read On

We all like investing, right?

Sandy is investing her face off, buying rental properties faster than most of you buy underwear. Other people are buying the usual – stocks and bonds – usually within their 401k or Roth IRAs. And still others are investing in more non-conventional assets, like peer to peer lending or commodities or whatever else it is you kids spend your money on. Alas, buying 100 cheeseburgers is not a good investment, even though everyone likes cheeseburgers.

Anyway, as you’re probably already aware, every investment carries some sort of risk. Leaving your money in a CD is considerably less risky than buying shares in Apple, so the potential reward for buying Apple shares is much greater. CDs provide steady, albeit small returns. That’s the nature of investing, increased risk carries the potential for greater reward.

Going back to the title of this post, I’ve found a way to get a potential 36% return. No, it doesn’t require any special connections, or research, or anything fancy like that. It’s actually remarkably simple.

All you need to do is buy nickels.

At this point, there is approximately 6.8 cents worth of metal in each American nickel. Yes, the government loses money each time they mint a nickel. They continue to do it because the economy needs nickels, even though the government loses millions making both pennies and nickels every year.

You probably think I’m crazy. Why would anybody buy nickels? I’ll let hedge fund manager Kyle Bass explain his thought process when he bought a million dollars worth of nickels back in 2009.

The value of the metal in a nickel is worth six point eight cents,” he said. “Did you know that?”

I didn’t.

“I just bought a million dollars’ worth of them,” he said, and then, perhaps sensing I couldn’t do the math: “twenty million nickels.”

“You bought twenty million nickels?”

“Uh-huh.”

“How do you buy twenty million nickels?”

“Actually, it’s very difficult,” he said, and then explained that he had to call his bank and talk them into ordering him twenty million nickels. The bank had finally done it, but the Federal Reserve had its own questions. “The Fed apparently called my guy at the bank,” he says. “They asked him, ‘Why do you want all these nickels?’ So he called me and asked, ‘Why do you want all these nickels?’ And I said, ‘I just like nickels.’”

He pulled out a photograph of his nickels and handed it to me. There they were, piled up on giant wooden pallets in a Brink’s vault in downtown Dallas.

“I’m telling you, in the next two years they’ll change the content of the nickel,” he said. “You really ought to call your bank and buy some now.”

There’s the thought process. There’s more value in the metal than there is in the value of the currency. Which is great, except for one thing. How do you ever get paid face value for the metal? Remember, it’s illegal to deface U.S. currency in most any way, so you’re not allowed to buy a bunch of coins and then melt them down.

Bass is betting on one of two things happening. Either the United States government throws up their hands and decides to no longer mint nickels, which would now make these coins into nothing more than metal with a dead president’s face on them. At that point Bass would be free to melt down the coins and reap his profit.

Or, if you’re a bit of a conspiracy nut like Bass is, you’re thinking the U.S. is going to print so much money that they’ll have to devalue the currency at some point. Basically, they’d take all the existing currency out of circulation, and reissue a new currency, which typically involves some sort of haircut on everyone’s savings. The most likely scenario is $100 turns into $10, and so on. Now I’m not saying this is going to happen, but if it does, replacing coins is usually prohibitively expensive, so the government doesn’t bother. Therefore, coins become a way to store value.

(In the interest of length, I don’t think I did a good enough job explaining a currency devaluing. If anyone has any questions, let ‘em fly in the comments.)

So what happens if the investment doesn’t work out? A nickel is always going to be worth a nickel, so Bass will be able to sell them back to a bank at face value. All he’s lost in the process is a little value due to inflation, as well as a little bit of opportunity cost. It is, after all, hard to invest a million dollars when it’s in the form of 20 million nickels.

I don’t know about you guys, but I’m kind of tempted to go buy a few hundred bucks worth of nickels. I’m not going to, for obvious reasons, but the concept is kind of cool, don’t you think?

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5 Comments

  1. Very interesting! Although I see the possibilities, I would not consider this as an investment for me. I like a more assured return and there is a good possibility of a zero return.

  2. Sorry, my point is that one of the two very unlikely things Bass predicts MUST take place–either nickels are entirely discontinued AND are deprecated or hyperinflation must occur that leads to the revaluing of the US currency much like the peso got revalued in the 80s or 90s or whenever that was.

    If the US mint just stops making nickels out of nickel or if they discontinue striking more but keep them as legal currency, you can’t touch them.

    That’s not a 38% return in my mind. Factoring the likelihood, that’s more of a 1% return or less.

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