The mint's increasing markup on bullion gold eagles

The U.S. mint is authorized to sell gold eagle bullion coins at a sufficient markup to recover its costs, but not to make a profit on them, unlike the base metal coins which it's authorized to sell at face value. However, the current markup on gold eagles appears to be far higher than what's authorized.

A penny costs less than two cents to manufacture, including the cost of the metal. A nickel costs less than 10 cents, more than six cents of which is the cost of the metal. (This means the mint sells pennies and nickels at a loss, which is why there are calls to eliminate them or change their metal composition.) A golden dollar costs 12 cents, more than seven cents of which is the cost of the metal. Five cents for each golden dollar, and the similar few cents for each quarter, dime, and half dollar, covers the cost of processing the raw metals, making the coin, doing quality control, packaging it up in bulk, shipping it out, and covering all of the mint's operating expenses. Only the cost of the raw metals is excluded from that five cent cost. Even if we're very generous and assume that manufacturing a bullion gold eagle costs twenty times what it costs to manufacture a coin from copper, nickel, and zinc for circulation, that's still only one dollar for the gold eagle, excluding the cost of the metal.
The mint could recover its costs on golden dollars even if it sold them each for 12 cents. It's authorized to sell them each for $1, and thus make a profit, which is delivered to the treasury. It could recover its costs on gold eagles if it sold them each for $1 plus the cost of the metal. Ten years ago, the mint's markup for gold eagles over the metal cost was more than $10. Why? Anyway, the mint was definitely recovering at least its costs. Even if we assume that there were some legitimate costs being covered by that high markup, it would still be less than $20 today, adjusting for inflation. Yet the markup today is almost $60. Even if the mint was just recovering its costs ten years ago, it's recovering three times its costs today. This is because, rather than just recover its costs, the mint sets the price of each coin in proportion to the costs of the raw metals used to make it. But the mint isn't authorized to do that. It's only authorized to add the costs of the metals, not multiply by them. As the costs of the metals increase, as they've been doing over the past ten years, the markup on each new coin as a percentage of the cost of the metals should decrease, not remain constant. With a current gold cost of $1340/oz, silver cost of $28/oz, and copper cost of $4.33/lb, a one-ounce gold eagle should cost less than $1360 even while giving the mint a very generous benefit of the doubt regarding its costs, but in fact it costs $1400. This does not appear to be legal.

 

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You seem to forget there is a middle man involved with the sale of bullion items.


"The price of the gold bullion coins is based on the gold content plus a fixed percentage premium of the gold price. The pricing of the precious metal content is established at the time of the sale: The London P.M. (second) Gold Fix on the date following the day of the order, excluding federal government holidays. The fixed premiums are a percentage of the gold price: 3 percent, 5 percent, 7 percent and 9 percent for the 1, 1/2, 1/4 and 1/10 ounce coins, respectively. The set premiums charged cover all of the United States Mint’s manufacturing, marketing and distribution expenses. The United States Mint reserves the right to alter the pricing mechanisms and vary the premiums charged for the gold bullion coins as circumstances dictate. Any such change will not affect orders accepted prior to the announced change."

http://www.usmint.gov/consumer/GoldAPRequirements.pdf

 

No, I'm not forgetting. And the quote you provided has nothing to do with the middle man's markup, anyway; it just discusses the mint's markup, which is exactly what I wrote about. If gold costs $1000/oz and the mint sells a 1oz gold eagle to a middle man for $1030, it doesn't matter if the middle man sells it to somebody else for $1031 or for a million dollars. I'm talking about the price which the mint sells the coin for: $1030.
Just as I wrote, your quote agrees: the mint sets its markup as a percentage of the cost of the raw metals, and dubiously claims that this just covers the mint's expenses. My point is this: if one day gold costs $1000/oz, and $30 covers the mint's expenses for a coin, are we expected to believe that if the next day speculation drives gold to $5000/oz, the mint's expenses for a coin are suddenly $150? That's absurd. If the expenses were $30 yesterday, then they're $30 today, and a coin today should cost $5030, not $5150.

 

You also have to factor in the cost of labor and materials other than just the PM. Those costs don't remain the same over a ten year period.

 

I did account for such price inflation. Please re-read my original message.

Let me address some other technicalities here so that everybody can focus on the actual issue I raised rather than getting sidetracked by irrelevancies: as a simplification, I lumped the 1/11oz of silver and copper alloy in a gold eagle in with the 1oz of gold in the specific example numbers I cited in my original message. I also used a markup of 4.5% rather than the mint's quoted 3%, partially to cover lumping the silver and copper in with the gold. None of these things undermines my argument, which is that the mint sets the price of each coin as a constant percentage (1.03% or whatever) of the cost of the raw metal, even though the cost of the metal has increased faster than the mint's other costs (including labor and other materials) even when adjusted for inflation, and the result is that even if the mint was just recovering its costs ten years ago, it's recovering far more than just its costs today, which it isn't authorized to do. In order to recover just its costs, the mint would have to increase its per-coin absolute markup (for example, $10 ten years ago) just to match price inflation for its expenses, and then ADD the cost of the raw metals. Thus, for example, if the metals cost $325 ten years ago and a coin cost $335, which is a markup of $10 to cover the mint's expenses, and today the metals cost $1300 and there has been 7% annual inflation over the past ten years (that's very generous; in fact it's been lower than that), then today the mint's expenses are $20, so the coin price should be $1320. In contrast, the mint's scheme of setting the markup as a constant percentage of the cost of the metals would result in a coin price of $1340. That's a $40 markup, which is double the markup which the mint is authorized to charge.

 

Don't you suppose gold and other PM coins entail higher expenses for security at all stages of processing?

 

Another factor is overhead allocation. These are the mints costs that have to be allocated to products. I am sure they can come up with a way to overallocate to PM's versus other products and still legally be "costs" in following the law. I have a lot of familiarity at how non profit organizations cost shift from departments that are supposed to be cost neutral to other departments. Its all a shell game, and by playing it they can justify themselves a big old raise.

Look at the wages and benefits of mint staff and administration and it will make you sick. Only the government can run a "business" like this and expect to stay in business.

 

Hey Ted,

First of all, welcome!

Ok I get what you are saying and I do not like the markup either, but I think you may be comparing Apples to Oranges. First you have the circulating coins that are produced in a high speed press at 800 coins a minute with probally less than 1 guy running it (I am guessing that one employee could keep an eye on more than one press at a time) VS and I will quote from the mints website here...."a specialized minting process, which begins by manually feeding burnished coin blanks into presses fitted with special dies. The coin is struck multiple times so the softly frosted, yet detailed BLAH BLAH BLAH... you get the point . So there is A LOT more labor involved in just making the bullion coin. Now lets mention Security, Sourcing the metals and the hedging needed. That all is going to cost major money. Remember the Mint has to at least break even, by law! So bottom line, do I think that they could do a better job? OH YEAH!!!!! For sure man! Do I think they are totally ripping us off? Not so much. Just my two cents.

 

Soaring Eagle,
Your quote "a specialized minting process, which begins by manually feeding burnished coin blanks into presses fitted with special dies. The coin is struck multiple times so the softly frosted, yet detailed"
refers to proof coins. I'm not talking about proof coins.
For the plain bullion coins I'm talking about, remember the actual numbers: five cents per golden dollar covers ALL of the mint's costs for it except for the raw metals, but the mint claims that covering a gold eagle's costs requires 800 times as much money. Besides that, my point isn't the absolute costs, but that the fact that the mint's claimed costs for gold eagles have far outpaced inflation over the past decade, and that the mint's own statements that the price it charges for gold eagles is proportional to the costs of the raw metals, indicate that the mint is exceeding the prices which it's authorized to charge.

I didn't say the mint is ripping us off. In fact its coins are priced competitively with private gold rounds, such as the apmex rounds which GDJMSP pointed out here in another thread. The difference is that apmex is authorized to make a profit on its rounds, but the mint is not authorized to make a profit on gold eagles.

Soaring Eagle and JeffB,
Yes, securing gold costs a lot of money. That's just another one of the mint's expenses. Securing more gold because there are more coins doesn't affect the per-coin expense. Securing more value because the price of gold goes up does increase the per-coin expense, but at a far lower rate than linear proportion, so this doesn't justify the mint's linearly proportional increase in coin prices.

Medoraman,
Thank you for addressing the actual issue I raised! (You're the only person to have done so.) As saddening as your explanation is, it's still probably the right one.

 

Aren't the blanks for gold bullion coins made by an outside supplier? I thought I read that somewhere.