Throughout the second half of 2008, the US Mint has had problems with the supply of gold coins for the collector and investor market. Gold American Eagle and Buffalo coins were is short supply causing the US Mint to suspend and limit gold sales before changing the pricing policy of all precious metal products. Could the US Mint be trying to discourage gold ownership?

Michael Zielinski, author of Coin Update and Mint News Blog, writes about this on the Seeking Alpha blog. Zielinski tracks the actions taken by the US Mint and their explanation for the actions noting that “the consequence of each action has been to limit or discourage gold ownership.”

Zielinski notes that the US Mint will be lowering the number of gold options by eliminating fractional issues and suspending the American Buffalo issue altogether.

“Whether or not it was the US Mint’s intention, every significant action they have taken since August has either limited gold availability, eliminated gold product options, or increased the cost of acquiring gold,” Zielinski writes. “Has it all just been a consequence of surging global demand for gold, supply chain mismanagement, and bad timing for policy decisions? Or is there something else going on here?”

Please read Zielinski’s full article at Seeking Alpha.

If you have been watching the US Mint this week, you may have noticed that the 2009 Ultra High Relief Saint Gaudens Double Eagle started to sell on January 22, 2009.

With a limit of one coin per household, the catalog page advises “Orders will be processed on a first-in, first-out basis, and could potentially take up to six to nine months to complete based on gold blank availability.” (emphasis added) They further explain that the Mint will not charge your credit card until your order ships. This means that the coin could cost more than the current $1,189.00 price. With the changing price of gold and that the first coins will not be available until February 6, 2009.

According to the new precious metals pricing policy, the price of gold products will be adjusted based on the Thursday AM London Fix price. Since the price of gold on Thursday, January 22 was $847.75 per ounce, the current price of the coins will not change on Monday. However, the Friday AM Fix was $873.00 per ounce and the PM close was $875.75. If the price does not come down, the coin’s price could rise to $1,239.00 before one coin is delivered.

As a consumer, when I purchase a product, even if it is backordered, I am locked into the price at the time of the order. Even if the backordered item takes three months to fulfill, my price is guaranteed. In fact, if the price goes down many vendors will adjust the price to the new lower price. This is the definition of customer service.

The US Mint, being run by a bureaucrat, opens sales at one price that has the potential (based on current market conditions) to rise before the first coin is delivered two week later.

An opposing argument will be the fluctuating price of gold and market conditions. However, the Ultra High Relief coin is being sold as a collectible item, not as bullion. It is understandable if bullion changes based on market conditions, not for collectibles. Further, as the price of silver fluctuates, the Mint does not adjust the price of American Silver Eagle Proof or the annual silver sets when the spot price of silver changes. Did the Mint lower the price of silver products after the price plummeted from $20 per ounce?

Another reason that the Mint should not be adjusting the prices of collectible coins once ordered by the consumer is that the Mint has variability built in to the price. At the bottom of the new pricing tables is a note that says “cost of metal 71%-74%, cost to manufacture (including overhead) 11% – 14%, and margin 15%.” How does the cost of manufacture change so variably as the price changes?

After writing computer programs for many types of business, I had taken business courses to understand how business works. In the basic business courses I learned that when analyzing the overhead, most of the costs are fixed. Variable costs do not vary greatly with maybe the exception of the costs of energy. However, most of the variable costs are not based on a percentage of the costs. Overhead usually comes from fixed costs, such as facilities, machinery, labor, etc. Variable costs are based on the cost to produce a unit of the item. These variable costs include energy and material costs. However, the Mint is already saying that 71-74 percent of the price is based on the cost of the metal. So what are the variable costs in coin manufacture?

Let’s look at the numbers. Assuming an 11-percent cost of overhead at the low-end of the the Mint’s price range, the Mint is saying that when the price of gold is $800 per ounce, the cost to manufacture is $122. But when the price of gold rises to $900 per ounce, the cost to manufacture is $133. Considering that the variable cost of the metal is calculated separately, why does it cost the Mint $11 more to make this coins when the price of gold rises by $100?

Does it make sense that the US Mint can fix the cost of the manufacture of billions of Lincoln cents and complain that it they cost more than face value to manufacture but they cannot nail down the cost of a coin that will have significantly less population?

The formal notice of the price change was published in the Federal Register Volume 74, Number 3, pages 493-496 (GPO Access: [text] [PDF]). The notice does not explain the rationale for the percentages used nor does it fully explain the cost of manufacture.

I will be asking my representatives in congress to ask the Mint to justify their pricing. I may also submit a Freedom Of Information Act (FOIA) request as well. I will report what information I gather. In the mean time, maybe President Obama’s administration should review my suggestion as to how to pick a new Mint director.