Recycling U.S. Coins into Silver

 |  Includes: COP, CVX, GLD, SLV, XOM
by: Michael Fitzsimmons

Tuesday night I spent commercial time doing my annual piggy bank "roll up."

Yup, I am one of those people who dump their spare change into a large glass piggy bank and once a year pull it out and roll up the coins. As I was rolling up the coins, it dawned on me how non-precious they have become. The pennies are no longer significantly copper, the "nickels" aren't nickel, or the dimes silver. I am sure someone out there knows (and cares) about the exact composition of the coins being minted today, but I don't want to dwell on that. The point is that U.S. coinage is "cheap." It's like they are made in China (wink, wink). Anyhow, I decided it was time to trade in fake money for real money. Ron Paul would be proud of me.

But what kind of real money do I want to own today?

My SeekingAlpha readers already know that I believe oil is the new world reserve currency. I would love to buy a bunch of oil and just store it in some tanks buried in my backyard. But that's impractical and probably against my local zoning ordinances. So, my choices really boil down to gold or silver or some other precious metal.

Although my mind tells me gold is going much much higher, my body won't let me pay more than $1,000 for an American gold eagle. Imagine this: A small stack of 22 American gold eagles is now the equivalent of a Toyota Prius. Amazing.

Of course, the game being played now is "the dollar game," where everyone agrees that the dollar is going to weaken, and thus gold and silver are going higher. The big question is: when will the Fed start raising interest rates and what happens then?

Here's my take: the Fed won't significantly hike interest rates until the employment picture brightens. I think that is at least a couple of quarters away. The employment picture will only brighten if the economy picks up. If that ever happens (which is not a given), industrial demand should pick up and we should see a corresponding uptick in silver demand. So, I decided to take advantage of the two day dollar rally (ha!) and pick up some silver. I bought some silver eagles for $18.22. Yeah, I know I paid a very high price. Let's look at the 5-year chart (courtesy of Kitco):

We can see the $20+ top set in during the early 2008 euphoria. We can also clearly see silver falling off a cliff during the deleveraging meltdown beginning in mid-2008. I believe the lows in October 2008 were overblown on the downside, just as the $20+ top was overblown on the upside. However, if we go back to the beginning breakout in October 2005 and draw a trend line on the bottom, it shows a potential for silver to breakout to new highs over $20 in the next 6 months or so. But that's just chart stuff. So, let's look at policy.

The U.S. government and the Obama administration believe they are "fixing" the oil import-led trade deficit by continuing the weak dollar policy of the Bush administration. Now, I'm not an economist, but in the long run what good does it do to weaken the currency to fix the trade deficit if the biggest component of the trade deficit (oil) is priced in U.S. dollars and goes up in price? Further, what good does it do when your largest trade deficit is with a country (China) that plays this game by holding their currency pegged to yours? It doesn't make sense to me, but I'm an engineer, not an economist.

The only threat to long-term appreciation of gold and silver (caused by a weakening U.S. currency) is if America solves its foreign oil import crisis by adopting natural gas transportation. But the Obama administration is "agnostic" about natural gas transportation and Congress, well, Congress is Congress. Enough said. The oil company executives at Exxon Mobil (NYSE:XOM), ConocoPhillips (NYSE:COP) and Chevron (NYSE:CVX) know what is ahead for the US when it comes to the oil crisis, but still they refuse to belly up to the bar and support natural gas transportation. So, I see clear sailing ahead for gold and silver (and obviously oil).

So, buy yourself some silver eagles and bulk silver bars. If you have an IRA that you've had for a decade and seen go nowhere (or more likely, down), you could participate in the precious metals rally by owning the SLV or GLD ETFs.

That said, if we have a full-blown currency crisis, which is certainly possible if China decides to fight an oil war with the U.S. by placing all their U.S. treasury notes on the market at the same time (I wish Congress would think about that when considering the Natural Gas Act legislation....), I wonder what good a paper ETF would be. Me? I'd rather take my real money silver coins down to the creek and bury them in the trunk of an old dead tree. I'll probably bump into Ron Paul....