Why you don’t melt junk silver or pennies or nickels

On melting circulating U.S. coins with a high “face value to melt value” ratio.

When I was researching my book How to Protect Your Life Savings From Hyperinflation & Depression, the light bulb went on in my head. It occurred to me that it would be really neat if somewhere in the world there was a circulating coin with a high melt-value-to-face-value ratio. So I googled that phrase.

There are two

Turned out there were two, and they were right here in the U.S.: the penny and the nickel. I learned about them at the coinflation.com web site. And it is great that they are U.S. coins because acquiring high melt-value-to-face-value ratio coins in another country and bringing them here would be expensive and is probably illegal in the country that mints them.

They used to all be high melt value to face value ratio

It used to be that all coins worldwide had a high melt-value-to-face-value ratio. That ratio was the whole idea of the coins.

They were worth their face value because they contained that value of metal in the coin.

After World War I, the end of specie

Then, after World War I, governments tried to get rid of specie, which I will define as high melt-value-to-face-value ratio coins. If it was up to government, all currency would be paper (or plastic sheets as some countries now use). In other words, governments want the melt-value-to-face-value ratio to be as close to zero as possible.

They do not like coins because coins cost more to make than paper or plastic sheets. And they really hate it during the times when commodity prices rise to the point where they LOSE money making coins. That happens when the price of the metal in the coin rises so high that it costs the government MORE to buy the metal and do the labor and shipping of the coins than the face value of the coin. 

Illegal to melt or export and no more minting

When that happens and stays that way, the government usually does two things. First they make it illegal to met or export the coins. Why? Because if they did not, users of those metals in the U.S. and around the world would stop buying them in the normal metal market and would just buy the coins at the bank. It would be a cheaper way to get silver or nickel or copper or zinc or whatever the metal was.

Instant profit

Anyone who buys coins when the metal in them—called melt value—exceeds the face value, makes an instant profit. In the first chapter of his book Boomerang, Michael Lewis tells how Kyle Bass bought $1 million of nickels when the melt value of them was 8¢ each. The Federal Reserve delivered them to his warehouse in Dallas at zero cost. He paid $1 million and got $1.6 million worth of copper and nickel (nickels contain both of those metals). So he made an instant $600,000 profit.

We went through this before with ‘junk silver’

When the melt value of a coin exceeds the face value, they outlaw melting or exporting it. They did that with silver coins—dimes, quarters, and half dollars—back in the 1960s. They are now collectively called “junk silver.” They also did it with pennies and nickels in 2007 I believe.

No more use of that metal in coins

The other thing they do is announce that they are no longer going to mint the coin in question out of that metal. They did that back in the 1960s with regard to those silver coins. Dimes, quarters, and half dollars minted in 1964 and before are 90% silver.

You can see their value every day in the Wall Street Journal in a section titled “Cash prices.” They are the last item in the “metals” section and they are called “Coins, wholesale $1,0000 face-a.” 

On 3/26/18, the value was $12,213 which means a pile of those coins with a total cumulative face value of $1,000 would cost you $12,213. Another way to put it would be that on that day, each dime, quarter, or half-dollar was worth 12.213 times its face value.

So while the coins have a high melt-value-to-face-value ratio and the government is still minting them, they outlaw melting or exporting them.

But when they announce they will no longer use that metal to mint them, they promptly REPEAL the law against melting or exporting them. They did that regarding junk silver in 1965. They will do it regarding pennies and nickels one of these days—as Canada recently did.

Law no longer needed

Why do they repeal the no-melt-or-export law? Because they are no longer buying those metals to make the coins so they no longer fear the coins being bought for industrial uses rather than currency uses. You have been able to melt or export “junk silver” since 1965. It was illegal before then.

Should you melt them?

Does the repeal of the no-melt-or-export law mean you should immediately melt the coins in question? Hell, no! 

Avoid assay cost, sell to coin dealers

First coins are more valuable than a lump of the exact metal with an identical weight. Why? Because you do not have to assay them and they can be sold to coin dealers in small quantities. Nickel and copper ingots can only be sold to large industrial companies and they probably have large minimum quantities.

Hedge against deflation

More importantly, although hardly anyone understands this, is that the value of coins made of nickel and copper cannot fall below the face value of the coin because the words “five cents” are engraved on them. That means they are hedges against deflation like we had in the Great Depression. If you melt them, during deflation, their value could fall below five cents. But if you keep them as COINS, they will ALWAYS be worth at least a nickel at any bank—just as a 1964 or earlier half dollar is still worth 50¢ at any bank—although you would be nuts to give it to them. It is worth 12.213 x 50¢ = $6.11 at a coin dealer.

So even when the government announces they will stop making pennies and nickels out of copper and nickel, you would NOT want to melt them because you would lose the three coin advantages I listed above: premium for coins over ingots because of assay avoidance, ability to sell to coin dealers, and deflation hedge characteristics. If an industrial user or metal dealer wants to buy your nickels, sell them as coins and let THEM melt them.