I’ll take 1,000,000,000 Pennies Instead
link Mystery trader captures 80pc of Londons copper market – Telegraph.
Sometimes the comments to the articles are as interesting as the article itself. Having some interest in what goes on in the world, I tend to keep an eye on supply demand issues. Any hint that someone may be trying to corner a commodity means we should be paying attention. One of the comments to this article touches on the irony of metal coins eventually retaining their value over paper currency since there is a value to the metal. The possibility that the meltdown value can be greater than the numismatic value is intriguing. Even the lowly and disparaged penny. How funny would that be if a penny wound up being worth more than a paper dollar?
While this appears to be an extremely unlikely probability at the moment, some reflection on the value of much of today’s assets is in order. As we all observed during the recent mortgage and banking fiascoes, wealth can just disappear overnight. Not in the zero sum game way, but in a way where it just vaporizes. Consider the circumstances of the recent real estate bubble. For simplicity, imagine that there are only 100 homes in a subdivision. Anyone wishing to purchase a home in this area has to pay the going price. If the homes were all valued at $100,000 and the buyer was willing to pay $110,000 dollars for a home, then all of a sudden, the nominal value of all the homes went up by $10,000 apiece resulting in an aggregate wealth benefit of $990,000. Voila, money from nothing. The flip side of this is what happened when mortgages had no bearing on valuation and therefore prices fell. Using the same example, someone desperate to get out may sell for a $10,000 discount to the last trade. In that case, all of a sudden, $990,000 just disappeared. No one benefited, it’s as if it just vaporized.
Real estate happens to be an easy way to illustrate this, but the same scenario holds true for stocks, bonds and corporate and government obligations as well. The leverage impacted by movement in only a small portion of an interlinked and co-dependant pricing model is quite amazing. It is technically quite conceiveable that a nationstate can be unable to pay its debts outstanding and default. As most know, in that case, that nation’s fiat paper currency plummets bringing down with it all of the linked wealth value. In this scenario, melting down the coins of the realm would be better than an electronic bank statement showing how much cash you have. My opinion is that if western countries ever got this dire, such that paper currency is worthless, society will be in pretty rough shape. The only metal really worth having then is lead. Let’s not even go there.
The scenario described in the linked article is not directly addressing this issue, it only describes a developing market dynamic. In the real world, as the Hunt Brothers found out in the 70’s in their attempt to corner and squeeze silver, they’ll just change the rules once the pain gets too great. Lots of pennies will drop then.