The Rude Awakening
Wall Street, New York
Friday, May 5, 2006

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Dollars Make Pennies
By Eric J. Fry

The value of a U.S. dollar has tumbled 7% so far this year,
but the value of a penny has soared 70%. A couple of recent
European news stories shed some light on this monetary
mystery...and on why the value of dollars and pennies might
continue to diverge.

A Reuters news story reports: "Sweden's central bank became
the first among the developed economies to announce a major
reserves shift, saying it had raised its euro holdings to
50 percent of its $20 billion-plus reserves from 37 percent
and cut dollar holdings to 20 percent from 37 percent."

Meanwhile, down in France, Agence Presse reports: "A hold-
up gang in northern France has been targeting shipments of
copper and nickel, hoping to profit as the metals' prices
hit record highs."

While the Swedes sell dollars and the French steal copper,
much of the rest of the world is engaging in a similar sort
of arbitrage. A growing number of investors – both
governmental and private – are realizing that the supply of
dollars is limitless, while the supply of copper is
limited, as is the supply of nickel and zinc and natural
gas and crude oil. It is perhaps no accident, therefore,
that the dollar slumped to a new one-year lows this
morning, while copper and zinc are soaring to new all-time
highs...Gold, for the record, is hitting fresh 26-year
highs.

Although we continue to anticipate a harrowing, short-term
sell-off very soon in copper, crude oil and a few other
commodities, we also continue to anticipate a harrowing
long-term sell-off in the U.S. dollar. Much of the world,
apparently, is embracing a similar viewpoint.

The central bank of Qatar might not be a trend-setter, but
like the Riksbank of Sweden, it is clearly in the vanguard
of the shift away from dollars. Qatar's central bank
recently disclosed that it has been buying euros, and
intends to continue doing so until the bank's euro holdings
make up 40 percent of its $4.5-billion reserves. Several
other central bankers and financial big-wigs are also
kicking the dollar while it is down.

Last week, Russian Finance Minister, Alexei Kudrin,
questioned the dollar's merit as the world's "absolute"
reserve currency, given the size of the U.S. trade deficit.
Therefore, Russia's $61 billion oil stabilization fund is
beginning to invest in euro-denominated bonds.

"The dollar's dominance of all currency reserves... is
basically coming to its conclusion," asserts David Keeble,
head of fixed income strategy at Calyon, "and ultimately
this puts a lot of pressure on the U.S, because of its very
large current account deficit which has until now been
supported mostly by central bank buying."

But while central banks shed dollars, many private
investors are buying – or stealing – hard assets.

"Posing as police officers," France's Agence Presse
reports, "a dozen armed men broke into a metal recycling
plant in the northeastern town of Reims last week, taking
the director and his staff hostage. The gang ordered a
crane operator to fill two open-backed trucks with copper
scrap, before making off with the booty -- 40 tonnes of
metal worth some 200,000 euros (250,000 dollars).

"Four thieves -- also posing as police -- commandeered
trucks carrying sheets of nickel near the northern city of
Le Havre, once in January and again in March, taking the
drivers captive and releasing them in the Paris area.
Investigators believe the thieves were drawn by the soaring
prices currently fetched by both metals."

We would concur with the expert conclusions of the
investigating gendarmes. And we would also urge the thieves
to take up licit forms of base metal exploitation. The
thieves may not realize that they could simply buy pre-1983
U.S. pennies, melt them down and book a 140% gross profit.
That's because each of these older pennies contains about 3
grams of copper and about .1 grams of zinc. Current
metallic value: 2.4 cents per penny. Even newly minted
pennies, which contain almost no copper whatsoever, are
rapidly approaching metallic parity, thanks to the soaring
price of zinc. Post-1983 pennies contain 97.6% zinc and
2.4% copper. Current metallic value: .89 cents per penny.

We present this illustration merely to underscore the
obvious: A small piece of imprinted paper contains less
real-world value than a small piece of copper or zinc.
Furthermore, a U.S. dollar is a poor conductor of
electricity and combusts near an open flame. It contains no
measurable quantity of any element on the Periodic Table;
nor any resource whatsoever that could contribute to any
industrial application. Rather, a dollar contains little
more than a politician's IOU.

A U.S. Penny, on the other hand, contains sizeable amounts
of copper and zinc. So much so that its metal content
exceeds its stated monetary value.

The same nation that issues both dollars and pennies is the
same nation that spends more than it earns, that imports
more than it exports and that relies upon massive foreign
borrowing to sustain its bizarre breed of prosperity.

In such a world, it's a darn shame that the dollar contains
less intrinsic value than a penny.

[Joel's Note: If you don't yet have two pennies to rub
together, you might want to consider participating in the
raging bull market in commodities to help remedy that. Join
the maniac trader and bank profits in sugar, silver, gold
soybeans and more. Just remember to ask for your gains in
pennies. If you are serious about your financial future,
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