Mint in Crisis: The Inside Story of the Bullion Shortage of 2008, Part 2

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Part 2 of a four-part series. Part 1 can be read here; Part 3, here.


What is the journey that one takes to be the focus of a congressional oversight hearing? For me, that journey had begun 29 months earlier.

It was February 2008. I was sitting in my office at the U.S. Mint headquarters building. We were near Chinatown at 801 9th Street, NW. I was director of the Mint, and my large office was in the southwest corner of the building. Standing in front of me was my number two, deputy director Andrew D. Brunhart.

The director is appointed by the president of the United States, by and with the advice and consent of the Senate, while the deputy director is a career civil servant. As director, I was responsible for leading the Mint and accountable to Congress for its performance. There was a traditional division of work: the director, as a political appointee, provided policy direction and had a small team of additional political appointees to help develop policy. The deputy director, as a career civil servant, implemented the policy by running the operations, which were staffed completely by fellow civil servants.

Deputy Director Andrew Brunhart (left) and Dan Shaver.

Deputy Director Brunhart (left) and Dan Shaver, chief counsel to the Mint.

Andy and I were alone. It was his habit to give bad news to me straight, quickly, and privately.

“Sir, a spike in demand wiped out our inventory of silver bullion coins. It will take us awhile to make enough to meet demand. In the meantime, we will be in violation of the law,” he said.

Those words sent a bigger chill up my spine than was justified by the relatively mild temperatures of the winter we were having.

I asked what the immediate consequences were.

“Dan says there are no prescribed penalties for being in violation of the law. But he’s pretty clear about the urgency to get back in compliance.” Dan Shaver was the chief counsel to the U.S. Mint. “Cliff says that if Congress gets enough complaints from angry constituents, both Senate Banking and House Financial Services might have an oversight hearing to rake you over the coals.” No truer words had ever been said. (Cliff Northup was the Mint’s director of legislative affairs.)

“Well,” I asked Andy, “what’s the plan to keep me out of jail?”

The United States Mint’s Gold and Platinum Bullion Coin Programs

The U.S. government believes that it is important for American citizens to be able to own gold, silver, and platinum bullion coins.

Gold bullion coins came into existence when Congress passed the Gold Bullion Coin Act of 1985 (Public Law 99-185). It authorized the United States Mint to manufacture and issue 22-karat gold bullion coins and silver bullion coins under the American Eagle Bullion Coin Program. Congress also passed the Presidential $1 Coin Act of 2005 (Public Law 109-145), which, in addition to authorizing the Presidential $1 coins, authorized the Mint to manufacture and issue 24-karat gold bullion coins under the American Buffalo Bullion Coin Program.

Platinum bullion coins came into existence when Congress passed the annual omnibus appropriations bill for 1997 (Public Law 104-208), which authorized the U.S. Mint to manufacture and issue a platinum bullion coin. It is made as part of the American Eagle Bullion Coin Program.

Bullion coins are sold to Authorized Purchasers (APs). They can sell them to directly to the public or to other bullion dealers, who then sell them to the public. Authorized Purchasers were especially needed when the U.S. bullion programs were new, because a two-way market did not yet exist for bullion coins. Further, the federal government believed that the creation of such a market was not guaranteed.

To become an AP, an entity needs to meet certain financial and non-financial criteria. Once approved, they agree to maintain an open, two-way market. In other words, not only do they sell bullion coins but they must also buy them back from the public. (The Mint is not authorized by Congress to buy them back.) The AP program filled that gap and created the necessary market dynamics for liquidity.

United States Mint bullion coins are sold to APs at the spot price for the precious-metal content, plus a premium. The premium covers the bullion program’s operating costs, which include manufacturing the coin, administrative costs, and a reserve set aside for any unexpected expenses. And because the intent of the laws was to make bullion coins accessible to Americans, the Mint operates the programs to break even and thus makes only a nominal profit. The global bullion market is very competitive, which also helps keep prices low.

The Financial Crisis and Increasing Bullion Coin Demand

The Financial Crisis of 2007 and the resulting Great Recession dramatically increased demand for bullion coins globally. It started slowly; the first inklings began with an announcement by the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2007 that it would no longer buy the most risky subprime mortgages and mortgage-related securities. That announcement was quickly followed by the news in April that New Century Financial Corporation, a leading subprime mortgage lender, was filing for Chapter 11 bankruptcy protection.

Freddie Mac headquarters, Maclean, Virginia. (Photo by DLD)

Freddie Mac headquarters, Maclean, Virginia. (Photo by DLD)

By the summer of 2007, the crisis had gained momentum in the United States and begun spread around the world. In August, American Home Mortgage Investment Corporation filed for Chapter 11 bankruptcy protection. BNP Paribas, France’s largest bank, halted redemptions on three investment funds. In September, the chancellor of the exchequer authorized the Bank of England to provide liquidity support for Northern Rock, the United Kingdom’s fifth-largest mortgage lender.

During this time, the U.S. Mint experienced an increase in gold demand. Until summer, gold bullion sales had ranged from a low of 2,000 ounces per month to a high of 13,000 ounces per month. But when economic conditions began to deteriorate, gold bullion sales began to increase, jumping from 2,000 ounces in June to 5,000 ounces in July, and then to 22,000 ounces in August. Even though this was a big jump on a month-to-month basis, the increase in demand was well within the Mint’s bullion-coin production capacity.

For most of the next 12 months, every time the crisis appeared to get worse, a solution was brokered to mitigate the downside risks. For example, the consequences of Countrywide Financial’s collapse were contained when Bank of America purchased them in January 2008. Northern Rock was taken into state ownership by the Treasury of the United Kingdom in February, and the consequences of the failure of Bear Stearns were similarly contained when JPMorgan Chase acquired them in March.

Customers line up outside a Birmingham, England, branch of Northern Rock during a bank run on September 14, 2008. (Photo by Lee Jordan)

Customers line up outside a Birmingham, England, branch of Northern Rock during a bank run on September 14, 2008. (Photo by Lee Jordan)

So many near-catastrophes had an impact on the precious-metal bullion coin market. For example, silver bullion demand began to skyrocket. By February, dramatically increasing silver bullion sales wiped out the U.S. Mint’s inventory and current production of 2,170,000 ounces. Our team had doubled production from 550,000 ounces in October to 1,200,500 ounces in November, and then doubled production again to 2,324,500 ounces in December. After keeping up December’s pace in January, we ran out of the silver planchets used to make our silver bullion coins. That’s why deputy director of the Mint Andy Brunhart was in my office.

Our immediate problem was how to handle orders when our shelves were empty. My policy directive to Andy was to seek the solution that best met our statutory mandate of making sufficient bullion coins to meet demand. After conferring with me, Andy decided to temporarily suspend the sale of silver bullion coins until we could make enough to replenish our inventory. After receiving an ample supply of silver planchets, the Mint’s manufacturing team kicked into high gear and made 1,855,000 ounces in half the normal time so we could resume sales in March. But the entire inventory was wiped out instantly and we had to suspend sales again.

Until the Mint’s production of silver bullion coins could satisfy demand, we needed another solution to address the gap between the number of coins ordered and the number of coins produced. In April, after much internal debate, Andy and his team recommended a new approach called allocation. Allocation would analyze each Authorized Purchaser’s recent buying history against their current order and divide the limited supply of bullion coins proportionally so that they would be fairly distributed. That gave the Mint a mechanism to equitably deal with supply’s falling short of demand until the shortfall could be remedied.

The Financial Crisis made a dramatic turn for the worse in September 2008, when, in the brief span of 23 days, the financial world began to collapse. The U.S. government took over both Fannie Mae and Freddie Mac. Bank of America announced its intent to purchase Merrill Lynch & Co., and Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection. The Federal Reserve Bank of New York lent American International Group up to $85 billion, and Washington Mutual Bank was closed by the Office of Thrift Supervision.

American International Group headquarters, New York City. (Photo by Wikimedia Commons)

American International Group headquarters, New York City. (Wikimedia Commons photo)

These September problems were not just localized to the United States but reached into virtually every developed nation. The Federal Reserve created new swap lines and expanded existing swap lines to two-thirds of a trillion dollars. Participating central banks included Reserve Bank of Australia, Sveriges Riksbank, Danmarks Nationalbank, Norges Bank, Bank of Canada, Bank of England, and Swiss National Bank.

This resulted in a mad rush for gold bullion coins. Demand at the U.S. Mint more than tripled from 15,550 ounces in June to 50,000 ounces in July. They almost doubled again from July to August; the sale of gold bullion coins was suspended after 86,000 ounces were sold and inventories were wiped out. The allocation program developed for silver bullion coins was now implemented for gold bullion coins.

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Left to right: Headquarters of the Reserve Bank of Australia, Sydney (photo by Danausi); Stockholm headquarters of Sveriges Riksbank (Central Bank of Sweden; photo by Holger Ellgaard); Copenhagen headquarters of Danmarks Nationalbank (Danish National Bank; photo by Thue); Oslo headquarters of Norges Bank (Bank of Norway; photo by Mahlum); Ottawa headquarters of the Bank of Canada (photo by Wladyslaw); London headquarters of the Bank of England (photo by den99); Swiss National Bank (SNB) headquarters, Bern (photo by Baikonur).

When December 2008 ended, the Mint had increased the production of gold bullion coins from 198,500 ounces in 2007 to 860,500 ounces in 2008 , or a 433% increase. This was the third-highest number of gold bullion coins produced ever by the Mint and the largest number since the run-up to Y2K in 1999 and 2000. The production of silver bullion coins increased from 9,887,000 ounces in 2007 to 19,583,500 ounces in 2008, or a 198% increase. This was a new record for the U.S. Mint and almost doubled the previous record, set in 2002.

Searching for Solutions

The Mint’s first order of business was to determine what the future demand for bullion coins would be. No reliable, accurate forecasting model existed for predicting bullion coin demand. Further, while demand increased in the early days of the Financial Crisis, it fluctuated both up and down in a way that was seemingly unrelated to any particular catalyst. After September 2008, it was hard to predict whether the dramatically increased demand would be sustained, and no one knew how the Financial Crisis was going to unfold or how long it was going to last. Mike Stojsavljevich, the Mint’s chief strategy officer and a political appointee, and Patricia M. (“Marty”) Greiner, the chief financial officer and a career civil servant, were tasked with improving our forecasting models.

A Mint technician examines the quality of the dies that will eventually strike American Gold Eagle bullion coins. Coinage dies at the Philadelphia Mint, awaiting the production line. They will soon be used for striking American Platinum Eagles. (Source: American Gold and Platinum Eagles, by Edmund C. Moy)

A Mint technician examines the quality of the dies that will eventually strike American Gold Eagle bullion coins. (Source: American Gold and Platinum Eagles, by Edmund C. Moy)

What helped clarify our focus was the reminder of our statutory mandate to manufacture and issue bullion coins in quantities sufficient to meet demand. At the end of 2008, we were not in compliance with our statutory mandate. Heeding our legal advice to get back into compliance as soon as possible, I determined that our policy priority was to increase our production until our supply exceeded the market’s demand.

In order to do that, we had to focus on both the actions within our control and actions that were out of our control, and to do them simultaneously.

Within our direct influence was the ability to increase our production capacity, which would put us in a better position to meet our statutory mandate if demand continued to increase. The risk was that if demand decreased and we had excess capacity, I would be subject to criticism over wasting money to expand our capacity when it was not needed. For me, it was an easy decision. It was better to be in compliance even if we wasted some money rather than to be too frugal and be in violation of the law.

Outside of our direct influence was how to increase our supply of the precious-metal planchets used to make bullion coins. The vast majority of mints that make bullion coins outsource the fabrication of precious-metal planchets to a small group of companies. The challenge was to influence these private-sector companies with little risk to the taxpayer and without damaging this very small industry.

Low-Hanging Fruit

Andy and his team kicked into high gear. By June 2008, the demand for gold bullion coins began to spike, and in September the team implemented a few decisions that would increase our gold bullion coin production right away.

The first decision was to suspend the minting and issuing of platinum bullion strikes. Demand for American Eagle platinum coins had more than tripled from 9,050 ounces in 2007 to 33,700 in 2008,  in spite of our stopping production in September. But the platinum bullion strikes were produced on the same manufacturing lines as the gold and silver bullion strikes. It took a noticeable amount of effort to retool the manufacturing line from platinum to gold or silver and vice versa. Given the relatively small volume compared with gold and silver (20,444,000 ounces in 2008), suspending production of platinum bullion to gain more capacity for the bullion coins in greater demand was the right idea.

Coinage dies at the Philadelphia Mint, awaiting the production line. They will soon be used for striking American Platinum Eagles. (Source: American Gold and Platinum Eagles, by Edmund C. Moy)

Coinage dies at the Philadelphia Mint, awaiting the production line. They will soon be used for striking American Platinum Eagles. (Source: American Gold and Platinum Eagles, by Edmund C. Moy)

The second decision was to suspend coinage in the American Buffalo bullion coin program, for the same reasons. Demand for our 24-karat gold bullion coin had increased from 167,500 ounces in 2007 to 172,000 ounces in 2008.  While this volume was considerably higher than that for platinum bullion coins, it was still dwarfed by demand for the American Eagle 22-karat gold bullion coins and silver bullion coins. Suspending production on the American Buffalo also had the added advantage of freeing up capacity with our planchet fabricators so they could produce more 22-karat gold planchets.

The law also helped us prioritize. The American Eagle bullion coin programs had the statutory mandate to manufacture and issue bullion coins in quantities sufficient to meet demand. But the law authorizing the platinum bullion coin and the American Buffalo did not have the same statutory mandate.

Suspending the American Eagle platinum and American Buffalo gold bullion coin programs was a good start. The U.S. Mint also began cutting back on the production of other non–statutorily required coin programs, like Proof and uncirculated gold and silver American Eagles. But we still needed much more.


On Friday, Part 3: Expanding Production Capacity; Expanding the Planchet Supply Chain.

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Comments

  1. cagcrisp says

    @gatortreke, from previous thread “The quote you cite leads to angst on my part and something I’ve thought about more and more as the low interest rate policy continues and likely will do so for years to come. It would seem to me the 0% probability of achieving a 5% annual rate has disastrous consequences across the board, not only for savers from supposedly guaranteed pension returns to the ability of insurance companies to stay solvent and offer products”

    You should have angst. You have to go out on the yield curve or take on risk that Most are not accustomed to taking. I remember counciling my employees on their 401k when most had their money defaulted to a money market or fixed income account. They don’t understand that IF you don’t take on some risk you in effect have no chance.

    Many pension plans are the old fashioned defined benefit plans and those are the ones that will find themselves insolvent IF interest rates remain at historical lows…

  2. Ernesto says

    Since I wasn’t buying gold or platinum coins during that time I never realized/knew the impact the recession had on bullion production for gold and eventually silver. Interesting to read about what happened during that time.

  3. cagcrisp says

    @Dustyroads from previous thread, There are pros and cons to a Roth. I have a Roth, a traditional IRA and a taxable account. ALL serve a different purpose.

    Rule of thumb is IF you are young and in a lower tax bracket, Roth is best. Older and Higher income earners gets more murky…

  4. says

    Rule of thumb is IF you are young..,

    Sock away as much money as you can.., as quickly as you can…

    Don’t be tempted by our materialistic ways.., sock it away as much as you can through diversified investments.

    Money doesn’t bring happiness.., Money brings Options..,
    And having Options brings happiness…
    😃🎉

  5. earthling says

    Now THIS is what serious Numismatists want to be reading. Informative, interesting, well written articles like this will hopefully one day result in a lot of new traffic for MNB. As a side benefit maybe a few new folks might take an interest in accumulating a few US Mint Collectible products. If so, then all us old grumpy geezers might finally be able able to lessen the intensity of our harsh frowns – just a little.

    😉

    cheer up – a new day is coming

  6. Keep Calm & Stack On! says

    I too, would like to thank Mr. Moy and his Team for giving us the 2009 UHR Gold coin, and it is one of the most beautiful coins the mint has produced in over 100 years. I absolutely cherish mine!

    After reading Scott’s comment the other evening, I went back and contemplated all the numismatic releases from 2006 through 2011 under Mr. Moy’s leadership, and concluded that some of the most unique modern coin sets, designs, finishes, and the “extra effort” put into numismatic products is clearly evident and would appear to me as the high water mark in modern coin designs and quality.
    And I thank you and your team for that, sincerely.

    With that said, and changing gears here..,

    I must say that I find the proposed 2017 American Liberty gold coin design that may be promoted by the U.S. Mint as part of its celebration marking the bureau’s 225th anniversary a disappointment, and somewhat disturbing, as I see no correlation between the design and 225th Anniversary of the U.S. Mint, and I perceive the design to be just another example of political correctness posturing by a bureaucratic amoeba (or as often said on MNB, just more PC being shoved down our throats through poorly executed designs).

    I personally feel the current mint leadership is so far removed and out of touch with its current sustaining collector base that all hope for a may be lost for any support base going forward.., well, there may be an uptick in 2019 if we get Lunar Landing Comm, up until then, all bets are off.

    The current leadership team can “wish their way” through a year-long initiative to educate the public, and “wish their way” to engage new customers through a number of outreach events, and “wish their way” into energizing a new collector base.

    Well, truth be told.., that base ain’t there.
    They only to look back as far as to 1982 to present to get to know who their base is and what energizes us. Cag, you have any stats on what sells today? 😉

    The 225th Anniversary of the U.S. Mint is rather a big deal – it’ll be another 25 years before we see another Anniversary (well I probably won’t) – and should be conducted with the essence of a proud heritage, with class, and exudes a tremendous “Wow” factor.

    Time will Tell, I’m not giving hope yet, I just hope it doesn’t lend itself to another “swing and a miss” opportunity.

  7. Buzz Killington says

    Any tax strategy developed now is subject to uncertainty. We don’t know what the tax rates will be in the future. You could theoretically pay higher taxes now under a Roth IRA than you would under the tax rates when you retire. Not to mention, there are income limits to a Roth IRA.

    I’m not a believer in IRAs of any kind, because I’m not really a spender — I never want to take distributions.. I plan to take advantage of the transferred basis of my investments when I die, to avoid capital gains tax. If a few generations can keep that up, we’ll be talking real money. But there is no guarantee that the rules about making the tax basis the date of death value will stay the same.

  8. Mint News Blog says

    @Keep Calm & Stack On! — Thank you for your compliments on part 2 (and thank you, @earthling, as well!). I was worried that it was much too long for a single post, and I’m glad to know it’s getting the attention it deserves.

    Regarding the 2017 American Liberty coin, I have to respectfully disagree with you. Aesthetically, I find it a beautiful design, especially on a real coin as opposed to a pencil sketch. To my eyes, the artist has done an amazing job — the profile portrait is beautiful, elegant, and strong. That’s just my personal view; I’m sure there are coins I hate that others find quite appealing.

    Regarding the motivation behind the design, I don’t want to roam off into the weeds of a political discussion, and I want to discourage anyone else who reads this from doing so. The subject is important, but a comment thread is not a thoughtful, constructive place for the discussion. (If an MNB reader would like to start a forum or group to discuss these things, I’d be delighted to contribute.)

  9. HarryB says

    I have very little confidence in the Mint’s current leadership and marketing abilities. @Cag’s ideas for 10 oz and 100 oz silver bars should be the subject of planning studies right now! I have little faith we will see a 50th anniversary of the moon landing comm program without legislation. Sad. HarryB

  10. Barry says

    No doubt many of the US Mint’s customers switched from buying numismatic coins to bullion coins. Let’s admit that QE (money creation) drives bullion sales and not that of numis. Look also at the after market value of many of the clad sets. Maybe just making all the coins from PMs would help. Btw, I’m sure the mint already knows why people stopped buying just from their customers purchase history and no doubt their hands were tied to do anything about it. If they don’t know why they lost their customers they waited a long time to start analyzing the situation.

  11. Dustyroads says

    The proposed 2017 gold Liberty 1 oz. coin depicting an African American woman, even though it is a departure from typical American coin designs, does have a strong message. The coin is in fact a beautiful coin, but what really stands out is the significance it bears of where we have been and where we are going. There is virtually no sense left in us of what slave owners of the day had in mind. My heart goes out to the descendants of slaves who are strapped with the daunting task of being at ease and excepting their ancestors plights, while grasping for understanding of who they are. I have no such history to compare with that of the people who endured the slave trade practiced on our soil. Frankly, I’m honored that the US Mint has the courage to attempt to promote such a strong design.

  12. data dave says

    My idea for rebooting coin collecting in the US is to release coins into circulation that have some worth. An easy way the mint can do this without any congressional approval is to use their ability to mint existing coins at different mint locations. There is nothing to prevent the Mint from making 484,000 2017 s-mint Lincoln pennies and then slipping them into circulation. Or making a w-mint TR quarter. Give people a reason to look through their change at the end of the day. I bet a lot of people don’t even know the quarter has the ATB designs on it. The cost of doing this is very small, but the publicity would be large. If someone finds a $10 penny, they might either sell it or start collecting!

  13. Dustyroads says

    You’re right datadave, the publicity would definitely be there, and is when special coins are released into circulation.

  14. Scott says

    @ Keep Calm & Stack On! I agree 100% with your assessment of the proposed 2017 HR coin. I didn’t care for the 2015 coin either. On the 2015 coin, the physical proportions of miss Liberty seem odd and the letters used in LIBERTY are way too big. As for the 2017 coin, the stars on her head look ridiculous and the lettering in LIBERTY is still too large IMHO. I didn’t but the 2015 coin and I won’t be buying the 2017 either.

  15. cagcrisp says

    @1958 Chevrolet Bel Air, “Does anyone know if we are getting any moon landing coins for 2019 ?”

    The Current Congress will Not get it done. Only 11 co-sponsors in the Senate is a problem…

  16. cagcrisp says

    Just got an email from the US Mint

    Household Order Limit Lifted!
    2016 Coin and Chronicles Set –
    Ronald Reagan

    “ACT NOW We’ve lifted the household order limit on the 2016 Coin and Chronicles Set-Ronald Reagan.”

    TLTL

    You only have 1 day to get these household limits correct (and that day has passed)…

  17. cagcrisp says

    The question is “Will the 2016 Ronald Reagan ever hit 50,000”?..

    Mintage limit of 150,000. I sure Hope they didn’t get packaging for 150,000. How could the Mint be That far out of touch with their 500,000 customer base?

    A mintage limit of 50,000 with a Reasonable HHL and these would be Gone Gone Gone. Now another Die on the Vine…

  18. Bob says

    Has something changed with the web site? Please register me as someone seriously annoyed by having to “page” through to read a whole article…5 pages for such a short one is absurd…please put it back on a single page!

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