Precious Metals

House subcommittee takes on bullion coins

Four witnesses appeared April 7 before the House Committee on Financial Services’s Domestic Monetary Policy and Technology Subcommittee for a 70-minute hearing titled “Bullion Coin Programs of the United States Mint: Can They Be Improved?” and recommended changes in the Mint programs. The subcommittee is chaired by Rep. Ron Paul, R-Texas.

Invited by the subcommittee to offer testimony to and answer questions from subcommittee members were Coin World Editor Beth Deisher; Terence Hanlon, president of Dillon Gage’s Metals Division in Dallas; Ross Hansen, founder of Northwest Territorial Mint in Auburn, Wash.; and Raymond Nessim, CEO of Manfra, Tordella & Brookes Inc. in New York City.

Accepted as part of the record were comments submitted by Texas dealer Mike Fuljenz, owner and president of Universal Coin and Bullion in Beaumont, who lost hundreds of thousands of dollars in advertising after the Mint changed its distribution rules for the America the Beautiful 5-ounce .999 fine silver bullion coins.

Rep. William Lacy Clay, D-Mo., ranking Democrat on the subcommittee, obtained unanimous consent to seek responses from the U.S. Mint since Mint officials were not invited by the subcommittee to present testimony at the hearing. The Mint released a statement shortly after the conclusion of the hearing (see related article above).

Ron Paul

In his opening remarks before the formal presentation of testimony, Paul said it is understandable that the American public is flocking to gold and silver bullion coins, citing economic concerns.

Also, “in a market as potentially volatile as the precious metals market, and given the Mint’s status as a self-funding agency, it is understandable that the Mint does not want to store millions of ounces of precious metal planchets whose dollar value could conceivably drop by the time they are minted and sold,” Paul said. “However, this uncertainty and the cyclical nature of coin sales makes it difficult for planchet suppliers to gauge future demand, meaning that they are less likely to invest in capital equipment to increase production,” Paul said.

Paul said with unprecedented demand, silver American Eagle sales are on target to top 48 million coins. “Considering that total American silver production is only around 40 million ounces, this would be a significant sales figure, making it all the more important that the Mint minimize disruption.”

Beth Deisher

Deisher said, “Most of the Mint’s problems in marketing bullion coins are rooted in an ongoing failure to understand who its customers are and why they purchase bullion coins.”

Deisher cited as an example the 1995 10th anniversary set comprising four gold Proof American Eagles and a Proof 1995-W American Eagle silver coin that was only available in the set. The high-ticket, limited-edition product at $999 stopped many collectors from seeking to purchase the set, and interrupted the collector quest for series completion, Deisher said.

Deisher also cited the proliferation of Mint coin programs and the burden that places on collectors. Collectors, many of them on fixed collecting budgets, are now having to be more selective by picking just one series, with the desire for completeness a thing of the past, she said.

Deisher referred to the Proof 1995-W American Eagle silver coin as a “contrived rarity.” Only 30,125 of the 10th anniversary sets were sold.

On a related matter, Deisher said, “Marketing multi-year bullion coin programs appears to be an area in which the Mint continues on a self-destruct path, in which mistakes made in the first year of offering dramatically reduce sales potential for the remainder of the program.” She cited the First Spouse gold $10 coin program introduced in 2007 in which dealers and speculators squeezed out individual collectors. Secondary market prices soared and discouraged many collectors from pursuing complete sets, she said. In 2009, the American Eagle program was disrupted by the Mint sticking to its mandate of striking bullion coins while abandoning production that year for Proof gold and silver versions, thus placing a void in collections of the series, Deisher said.

The America the Beautiful 5-ounce silver bullion coin program has created significant problems in the collecting community, with mintages for the 2010 coins a third of what Mint officials initially announced, Deisher said. And with mintages set at 33,000 per design and not 100,000 as previously announced, Deisher questioned the wisdom of deciding to offer an Uncirculated version with the P Mint mark with a mintage of just 27,000 coins per design.

Deisher said the Mint should be working ahead on programs to ensure a smooth release. She said many of the problems plaguing the U.S. Mint are not seen with other world mints. Among Deisher’s recommendations to improve the Mint’s bullion coin programs:

??Avoid purposely creating rarities.

??Spend time and resources to better acquaint its marketing staff with its various customer constituencies for its coin products.

??Better inform its customers as to when its coin products are going to be available.

??Produce to demand by allowing a certain number of days for collector versions of bullion coin products to be ordered.

??Increase bandwidth on its website to facilitate the handling of high-traffic ordering periods.

??Secure more planchet suppliers, and better plan procurement and manufacturing so as to avoid disrupting coin programs.

??Exercise care in scheduling bullion coin sales so that they are more evenly spaced throughout the year and not release coins into the marketplace at the end of a calendar year.

Terence Hanlon

Hanlon noted that Dillon Gage, as an authorized purchaser, is a key distributor of U.S. Mint bullion coins and is looking forward to the introduction of the palladium series in 2011, authorized under the American Eagle Palladium Bullion Coin Act of 2010. (The palladium coins can be released only after a Mint market study.)

“This is an extraordinary time for the global precious metals market as demand for these metals climb, and prices are at or near record highs,” Hanlon said.

Hanlon testified that in 1981, the Economic Recovery Tax Act established within the Internal Revenue Code tax rates of 28 percent on long-term precious metals investments and 15 percent on securities and mutual funds.

By lowering the precious metals investment tax rate to 15 percent, Hanlon believes investment in U.S. Mint bullion products could increased 30 to 50 percent.

In response to a question by Paul about the possibility of the Mint selling bullion coins directly to the public instead of through authorized purchasers, Hanlon said it would be wrong for the Mint to do that, since the Mint would not be able to provide a two-way liquid market and cannot hedge.

Ross Hansen

Hansen — who noted that two years ago he purchased Medallic Art Co., once a primary producer of silver blanks for the Mint — said that blank shortages have caused numerous problems, including:

??The premiums charged by the authorized purchasers to the secondary market fluctuate wildly.

??Sales have been lost, depriving the Mint of significant revenue.

??The bullion programs of foreign mints have been allowed to penetrate into the U.S. market.

Hansen said his firm has the ability to provide the Mint with sufficient blanks in all precious metals. He said he has contacted Mint officials about providing test blanks from which to determine his firm’s acceptance as a supplier, but was rebuffed.

To improve Mint blank procurement, Hansen recommends:

??Creation of an industry advisory group comprising experienced minting professionals (including equipment and raw material suppliers), to deal with production.

??Engage in an aggressive vendor-development program to assure that the Mint has multiple domestic suppliers to meet needs.

??That as part of the vendor selection, suppliers should have the ability and capacity to expand production and supply blanks as needed.

??That the Mint maintain a large inventory of blanks and finished coins to respond to surges in demand. Hansen said that Mint officials also need a change in attitude.

“They often display an attitude that used to be attributed to the phone company of ‘we don’t care, we don’t have to,’ ” Hansen said. “Their attitude toward vendors and authorized purchasers is often described as surly and arrogant.”

Raymond Nessim

Addressing the silver blank shortages for American Eagles, Nessim said the obstacles may be overcome by “extending some flexibility to U.S. blank fabricators in order to help them invest in additional capital equipment for increased capacity, maybe simply in the form of minimum quantity order guarantee per annum for a certain period of time, such as maybe three or more years.”

Of more concern to Nessim was how the Mint handled the America the Beautiful silver bullion coin distribution by limiting production, announcing sales for which authorized purchasers began wholesale distribution, and then the Mint suspending allocations amid public charges of price-gouging.

“We cancelled our sales agreements, which action placed us in a very embarrassing predicament,” Nessim said.

As a wholesaler and authorized purchaser, MTB was ill-prepared to retail market the coins to no more than one of each of the five coin designs per household, he said. He noted the Mint issued new directives to the authorized purchasers on March 9 for the 2011 series (see Page 4 article).

To avoid future calamities, Nessim recommended giving the authorized purchasers reasonable notice of price changes and minting plans, keeping authorized purchasers informed of developments as they occur, and lifting legislative obstacles that would allow the Mint to strike coins dated from a previous year to meet its original production plans.

While the Mint does have experienced management in bullion, procurement, precious metals, contracting and production, Nessim said “what appears to be void is an experienced senior chief executive with sufficient authority to act and report to a political appointee and to a board of directors comprised of a cross section of specialists with commercial experience, including U.S. blank fabricators and U.S. APs.”

Nessim said the U.S. Mint has not been responsive to companies who want to supply the Mint with blanks, including MTB. He said MTB’s parent company, which fabricates blanks, offered to send samples of the firm’s blanks to the Mint for test strikes but was turned down by Mint officials.

Mike Fuljenz

Among the recommendations that Fuljenz made in his comments submitted to the subcommittee are, for those who participate in the Mint’s Bulk Program:

??Release dates should be spaced further apart. The Mint is releasing Proof American Buffalo gold coins and Proof American Eagle platinum and gold coins within a 35-day period. Releasing three big programs in a short amount of time gives little time for dealers to effectively market and fund the coins. Concerning retail dealers who participate in the United States Mint’s Bullion Program, Fuljenz said:

??Dealers need more than 10 days’ notice about when new issues will be released. Improve the transparency with 30 to 60 days’ notice so dealers can plan their advertising and marketing.

??The Platinum bullion program needs to be consistently released in the same quarter each year. “We’re already in the second quarter of 2011, but dealers and collectors still don’t yet know when 2010-dated America the Beautiful special collector versions will be available, how they will be sold and why they were even made.” (See related article, Page 4, about the release of the first 2010 coin.)

??Properly identify on the Mint website national and local distributors of U.S. bullion coins. ¦

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