We're almost one month into the new year, and I'm finally ready to reveal my best investment for 2012. Warning: my choice is not a common stock. In fact, it's not common at all.
But before I launch into it, I need to lay the groundwork for this unconventional investment idea by addressing the ongoing inflation/deflation debate.
Inflation or Deflation: The Great Debate
Economists seem to agree that we're headed toward some type of significant future 'flation.' Unfortunately, they can't agree on whether it will be deflation or inflation.
'Deflationists' predict a period of de-leveraging, leading to a contraction of the money supply, falling prices and a stronger dollar. This tends to be a natural reaction following a period of excess borrowing. Under this scenario, U.S. Treasuries or just plain old cash is the place to be because as prices fall, dollars increase in purchasing power.
But deflation is public enemy number one according to the Fed, as evidenced by Ben Bernanke's long-term commitment to low interest rates. And 'inflationists' believe Bernanke and his printing press will successfully fight off the dreaded deflationary death spiral by injecting more money into the financial system than deflation is able to remove. If so, commodities should do well, and stocks could also rise.
[InvestingAnswers Feature: 'My Ultimate Market Forecast for 2012.']
It's important to be on the right side of this debate and invest accordingly because asset classes react very differently depending on whether inflation or deflation appears. Investors holding stocks during a deflationary period will likely get clobbered (see: Subprime Crisis). On the flip side, investors holding dollars if inflation rears its ugly head could end up with wheelbarrows full of very green kindling (see: Weimar Germany).
The perfect asset would thrive in both an inflationary and deflationary environment. Some argue gold fits the bill. But I've got a different idea, and it happens to be my investment of the year…
Yes, that's correct.
How Much Nickel is in a Nickel?
As we all learned many years ago, the nickel has a face value of five U.S. cents. But what you may not know is that it also has a metallic value -- the nickel is made of 75% copper and 25% nickel metal.
Currently, the metallic value is approximately 14% greater than the face value based on recent copper and nickel prices. And because metal prices tend to increase during inflationary periods, the spread will only increase if the inflation scenario plays out.
But so what? After all, it's illegal to melt U.S. nickels and pennies, sell the metal and profit from the difference.
You don't have to go through all that trouble anyway, because a secondary market exists for almost all U.S. coins. Nickels aren't a huge part of the secondary market yet, but that will all change if the federal government passes a law to alter the metal content of the nickel -- an action Congress is currently considering.
The same thing happened 47 years ago with the dime. In 1965, the federal government discontinued minting silver dimes and quarters. Today, you can sell a roll of 50 pre-1965 dimes (face value = $5) on eBay (NASDAQ: EBAY) for up to $135. A 10-cent coin from 1964 is worth $2.70 today. That's a compound annual growth rate of 7.26% a year. Not too shabby for cash.
[Use our Compound Annual Growth Rate calculator here.]
But here's the great part: The nickel provides deflation protection as well.
Remember, in a deflationary scenario, as the money supply contracts, prices fall and the purchasing power of cash increases. So regardless of the metallic value, the nickel will always be worth at least five cents and that five cents will buy more goods when prices fall.
So, no matter the circumstance (inflation or deflation) the purchasing power of the nickel should increase.
An Investment for the Mainstream
Only a kook cooped up in bunker would hoard nickels, right? Not exactly.
Consider this: Kyle Bass, founder of hedge fund Hayman Capital Partners, reportedly swapped one million dollars for a staggering 20 million nickels, saying that the metal inside each is worth 6.8 cents. Bass is famous for being one of only a handful of investors to make bets against the mortgage industry before the subprime mortgage meltdown.
It's one thing for a hedge fund manager to store 20 million nickels, but where does a normal investor put all that hardware?
Due to their weight, any significant volume of nickels should be stored at ground level. Neatly rolled nickels can be stored almost anywhere -- under the bed, in a box in the closet, in empty coffee cans. And it's a stealth form of metal investment, making it less prone to attracting the attention of thieves.
The Investing Answer: You don't have to pick sides on the inflation/deflation debate. Seek protection from both by swapping some paper dollars for nickels. Where can you get a bunch of nickels? You local bank will likely oblige, especially if you're an account holder. This website will sell you nickels and even store them for you -- for a small fee, of course.