Mexico's new 100-peso silver coin...

[Uncle Fester]

A few weeks ago I managed to obtain one of the new series of 100 peso
coins commemorating the 31 Mexican states plus federal district (I
got Estado de Tabasco).

I thought I had previously heard reference to silver on a Mexican TV
commercial advertising them, but assumed it only referred to the
proof versions, just like U.S. proof coins are minted in silver. But
I looked at my circulated coin and the center was awfully pretty and
looked just like silver, and I assumed it was silver-plate. But I
just looked it up and according to The Silver Institute
(http://www.silverinstitute.org/news/pr21nov03.html) the center of
the coin contains 16.812g of 0.925 silver. I calculate that as 15.54g
of standard 0.999 silver or 1/2 troy ounce.

Given today's market rate of US$7.50 per troy ounce for silver and
an exchange rate of 11 pesos per U.S. dollar, I calculate the silver
value of the 100-peso coin to be US$3.75, or 41.25 pesos. Though
the price of silver fluctuates, what this means is that the Mexican
government has actually minted currency that can't devalue past a
certain point! So if tomorrow the Mexican government devalues the
peso from 11 to 33 to the dollar (and silver remains at US$7.50),
holders of 100-peso coins will still possess US$3.75, even if the
face value of the coin is now worth US$3.03 instead of the US$9.09
when it was acquired. In other words, no matter if the government
devalues the peso by 3x, 10x, or 100x, holders of the silver
coins will never see the value of their coins decline below $3.75,
even if the face value is only fractions of a penny anymore.

Why did Mexico do this? It seems to completely contradict every
economic policy they've ever had. One site mentioned that the
coin makes Mexico the ONLY country in the world to presently
have a silver coin in circulation. Many countries mint special
proof editions in silver, and many put ridiculously low
currency denominations on 0.999 collector coins (e.g. the U.S.
Walking Liberty coin has a face value of US$1 for its 1 troy
ounce of silver valued at US$7.50). This is not the same
because putting a $1 denomination on $7.50 worth of silver
because normal inflation/devaluation means that over time the
actual purchasing power in face value terms means the coin
is worth less over time; compare this to Mexico's coin where
the normal inflation/devaluation means that the coin will be
worth MORE over time - in 10 years 100 pesos will likely buy
half of what it does today (even if the exchange rate to the
dollar remains constant) because of inflation, yet assuming
the price of silver remains fairly constant (actually,
inflation means the price should rise over time), the value
of the 100-peso coin greatly increases. Someone please
explain this to me, I am completely baffled.

[A You]

Post by Uncle Fester
A few weeks ago I managed to obtain one of the new series of 100 peso
coins commemorating the 31 Mexican states plus federal district (I
got Estado de Tabasco).

the center of

Post by Uncle Fester
the coin contains 16.812g of 0.925 silver. I calculate that as 15.54g
of standard 0.999 silver or 1/2 troy ounce.
Given today's market rate of US$7.50 per troy ounce for silver and
an exchange rate of 11 pesos per U.S. dollar, I calculate the silver
value of the 100-peso coin to be US$3.75, or 41.25 pesos. Though
the price of silver fluctuates, what this means is that the Mexican
government has actually minted currency that can't devalue past a
certain point! So if tomorrow the Mexican government devalues the
peso from 11 to 33 to the dollar (and silver remains at US$7.50),
holders of 100-peso coins will still possess US$3.75, even if the
face value of the coin is now worth US$3.03 instead of the US$9.09
when it was acquired. In other words, no matter if the government
devalues the peso by 3x, 10x, or 100x, holders of the silver
coins will never see the value of their coins decline below $3.75,
even if the face value is only fractions of a penny anymore.
Why did Mexico do this? It seems to completely contradict every
economic policy they've ever had. One site mentioned that the
coin makes Mexico the ONLY country in the world to presently
have a silver coin in circulation. Many countries mint special
proof editions in silver, and many put ridiculously low
currency denominations on 0.999 collector coins (e.g. the U.S.
Walking Liberty coin has a face value of US$1 for its 1 troy
ounce of silver valued at US$7.50). This is not the same
because putting a $1 denomination on $7.50 worth of silver
because normal inflation/devaluation means that over time the
actual purchasing power in face value terms means the coin
is worth less over time; compare this to Mexico's coin where
the normal inflation/devaluation means that the coin will be
worth MORE over time - in 10 years 100 pesos will likely buy
half of what it does today (even if the exchange rate to the
dollar remains constant) because of inflation, yet assuming
the price of silver remains fairly constant (actually,
inflation means the price should rise over time), the value
of the 100-peso coin greatly increases. Someone please
explain this to me, I am completely baffled.

A coin with a precious metal value greater than its face value will not
circulate while a coin with a face value greater than its precious metal
value will circulate.

[Uncle Fester]

Post by A You
A coin with a precious metal value greater than its face value will not
circulate while a coin with a face value greater than its precious metal
value will circulate.

That actually happened before, in the mid-1980s after hyperinflation
meant that the older coins in circulation (e.g. the quite large 1
peso coin) had a base metal content worth more than their face value.
There were reports of people purchasing huge amounts of old pesos at
face value and melting them down or shingling roofs with them, etc.
The government responded by making it illegal to destroy coinage and
also issued a new series of high-denomination coins with a base metal
content worth less than face value (which devalued again until the
face value once again approached metal content).

I've got a huge collection of circulated old pesos, most from the
1970s and 1980s but also a few very old coins I purchased from
dealers. I'm almost done cataloging every coin in that set and then
I'll calculate the total face value and also the dollar equivalent
(my rough guess is less than US$3.00). Then I shall research every
coin's metallic composition and weight and calculate the actual
value based on the market price of the metal it is composed of.

But my question is why the Mexican government would do this? It
was traumatic enough for countries to abandon the old gold/silver
standard, but they quickly got over it when those governments
realized they had the power to completely control the value of
the currency (something Mexico's ruling party used to enrich
themselves). Putting silver back in coinage removes the ability
of Mexico's government to control the value past a certain
point - in this case roughly 300%, a far cry from the tens of
thousands of percent it devalued the peso in the past.

[Arturo Magidin]

Post by Uncle Fester
But my question is why the Mexican government would do this? It
was traumatic enough for countries to abandon the old gold/silver
standard, but they quickly got over it when those governments
realized they had the power to completely control the value of
the currency (something Mexico's ruling party used to enrich
themselves). Putting silver back in coinage removes the ability
of Mexico's government to control the value past a certain
point - in this case roughly 300%, a far cry from the tens of
thousands of percent it devalued the peso in the past.

This is not a regular coinage issue, but a special one. The coins are
only being minted for a short time, and they are being "marketed" more
as collector's items than as circulating coins. Similar coinage back
in the 80s (the $200 coins commemorating the 175th anniversary of the
start of the Independence, the 75th of the Revolution, and the
commemorative coin for the World Cup), though lacking in precious
metal content, nonetheless did not stay in circulation for long: there
weren't that many to begin with and people kept them as souvenirs.

These coins are not meant to replace any other coinage, there will be
relatively few minted, and it the value of the metal is less than
half the face value of the coin. This is in keeping with other
coinage, whose metal content (though less obviously valuable than gold
and silver) is nonetheless non-negligible. The central bank also does
not mind if the coins simply drop out of circulation for a while (5-10
years): diminishing the amount of circulating money eases inflationary
pressure. Not too much, since we're not talking about too much money
here, but still.

[z***@hotmail.com]

Post by Uncle Fester
But my question is why the Mexican government would do this? It
was traumatic enough for countries to abandon the old gold/silver
standard, but they quickly got over it when those governments
realized they had the power to completely control the value of
the currency (something Mexico's ruling party used to enrich
themselves). Putting silver back in coinage removes the ability
of Mexico's government to control the value past a certain
point - in this case roughly 300%, a far cry from the tens of
thousands of percent it devalued the peso in the past.

You have to remember that most money today does not exist in physical
reality. Most money is in the form of checking and savings accounts,
mere information stored on servers. And most of the physical money in
circulation is fiat money made of paper (and now plastic too). Metal
coins are the tiny minority, and silver coins tinier still. So, putting
that tiny, tiny amount of silver into circulation does not in any way
limit the government's ability to control monetary policy.

Since 1994, the Banco de Mexico, Mexico's central bank, has been
totally independent from the government, and its Constitutional mandate
is to control inflation. Government-caused hyperinflation is a thing of
the past that was only possible under the PRI's party dictatorship.

Likewise, the huge devaluations seen in the past are very unlikely now
that we have $61 billion USD in reserves ready to defend the peso
against speculative attacks.

So these silver coins are nothing but collector items (I'm collecting
them too, they're pretty).

[Arturo Magidin]

Post by Uncle Fester
A few weeks ago I managed to obtain one of the new series of 100 peso
coins commemorating the 31 Mexican states plus federal district (I
got Estado de Tabasco).

Checking on the Casa de Moneda site, it is clear that this is not
meant to be a circulating coin any more than other recent 100
peso-silver coins have been. This is a special coinage meant for
collection, and the nominal price will change if silver fluctuates
enough. Just like the Centenario gold coin is nominally a "50 peso"
coin, which was its worth when it was first minted in the 100-th
anniversary of Independence, but is now exchanged at its true
metal-worth price.

The highest denomination circulating coin is well below 100 pesos;
this is not a true circulating coin, but a collectors special minting
issue. Hopefully that answers your question.