I want all of you silver (NYSEARCA:SLV) bulls to close your eyes and reminisce for a moment with me. I want you to remember the day when you could take a 1 dollar bill down to the bank and exchange it for a Peace or Morgan silver dollar. I know what you're thinking - "That would be sweet! If that was the case, I could just wait until the melt value of a silver dollar is higher than $1 and exchange my dollar bills for silver dollars at the bank." Right? You would be right, that would be awesome. Too bad they stopped making 90% silver dollars in 1935 and stopped making silver dollars altogether in 1976.
Well, I'm here to tell you that such a situation is upon us today, and, because of ETFs, it's actually better that it is happening today rather than 1935.
Starting in 1946, the USA started making Jefferson nickels that were composed of 75% copper (NYSEARCA:JJC) and 25% nickel (NYSEARCA:JJN). Although the cost of making a nickel is currently above 5 cents, the mint continues to make the coins and "sell" them for 5 cents. Currently, according to coinflation.com, a physical nickel is worth $.053. Yes, you could go "buy" some nickels at your bank and make a 6% profit by melting the coins down, but technically that's not legal.
You also could go and "buy" the nickels at your bank and just hold on to the physical coins for a long enough time to where they are worth selling on a secondary market like eBay or a jewelry store for their melt value. Buying and holding might be a good idea, but here's a better idea: use someone else's money to short the metals - with basically no risk.
I know, this is an article about being a nickel, copper, and silver bull (shoot, I'm even long all three of those metals), but the unique situation we are currently in creates an opportunity too good to pass up - the ability to short something with no chance of losing. This strategy could also be used as a hedge for your current long position.
Here's how you do it. Create a "5 cents" portfolio consisting of 3 parts short copper and 1 part short nickel. For example, you could short $7,500 worth of JJC and $2,500 worth of JJN. Next, with the proceeds from selling the 2 ETFs short, you go to the bank and exchange your dollar bills for physical nickels. If the price of the copper and nickel goes up by 50%, your 50% loss on your short position is canceled out by your 50% gain on your physical nickels. In that case, you would just have to go on eBay or to the jewelry store to sell your coins for melt value (much like people do all the time with silver US currency). If the price of these metals falls by 50%, go deposit your nickels that are still worth $10,000 back in the bank and use the money in your bank account to buy back the shares of JJN and JJC, which are now worth 50% less ($5,000), making a risk-free $5,000 profit.
I believe that, in the long run, the prices of copper and nickel are both only going to go up. Being that QE Infinity just started, inflation in the prices of metals will happen in the long term (bar some discovery of a huge deposit of a metal). In the near term, there is definitely a chance that it could go down.
Today the US mint is only losing about 6 percent per nickel, but soon the US mint will discontinue making these coins for a loss, especially if the loss goes up any more. That being said, if you are a bear or a bull, you better act quick, because soon the copper/nickel nickel will go the way of the silver dollar.
Please note you would incur some transaction costs associated with buying and selling of the ETFs, as well as the selling of the coins if you have to sell them on eBay for melt value.