Episode #252 – Is Your Pocket Change in Short Supply? Is it Time to Buy Gold? Fascinating Insights from a Former Director of the U.S. Mint

August 6, 2020

Listener questions about the current coin shortage lead us to today’s guest, Philip Diehl 35th Director of the United States Mint, former Chief of Staff of the U.S. Treasury Secretary and current President of U.S. Money Reserve.  He helps us understand the reasons for the current shortage and offers insights into how U.S. coin demand and production are managed. In the second half of the podcast, we discuss why owning precious metals, either physical or paper investments, should be considered as part of your portfolio and how economic conditions impact their suitability.

Program Length: 35 minutes

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Transcription:
The content shared on your life, your wealth network reflects the views of the host and guests of the program only and are not necessarily the views of Cordasco Financial Network or its advisers. This media production is educational in nature and should not be construed as financial, legal or tax advice or a solicitation or presentation of sale of any financial products or services. Please consult a professional prior to making any financial tax or legal decision.

Welcome to your life, your well network, helping you find clarity and comfort for your life. And well, now here’s your host.

Financial adviser and CEO of Cordasco Financial Network, Steve Cordasco.

Welcome to the Your Life Your Wealth podcast. Happy that you are joining us today. And as you know, we take your questions and topics that you would like us to talk about. And we have been a little bit inundated from many of you who are business owners talking about a pain point you’re having and running your business. And it’s kind of surfaced since the Cove IT crisis has been part of our life. And when I talk about business, I’m not talking about the fact of businesses being able to operate. I’m talking about businesses being able to function on their day to day business activity. There’s a coin shortage. So for many businesses who rely on coins, quarter’s nickels, dimes, change, there is a drastic shortage in our country. So joining me to talk about it is Philip Diehl, the thirty fifth director of the United States Mint. Philip is also former chief of staff of the U.S. Treasury secretary and currently serves as president of the U.S. Money Reserve. One of the nation’s largest distributors of U.S. government issued gold, silver and platinum coins. Philip, welcome to the Your Life Your Wealth podcast with me, Steve Cordasco. Thank you, Steve. It’s a pleasure to be with you. Yep. I’m thrilled that you were able to join us. And I’ve been delaying this conversation, just wondering where it fits in the list of priorities that we have so much to talk about when it comes to people’s life and their wealth. But yes, indeed, I’ve been inundated with people with this pain point who are business owners saying our business isn’t so much suffering from Kofod. We say we’re suffering in that we can’t operate because we don’t have money. And what I mean by money, it’s it’s the coins. So my question to you is, do you agree with the e-mails that I’m getting from many of the people who are listening right now to us that there is a coin shortage here in our country?

Well, there’s certain appears to be because I’m seeing lots of media reports about it. When I bake transactions, it’s typically with a credit card. And that’s one thing I think has happened is over the last several decades, we’ve seen increased use of credit cards and debit cards and electronic transfers and that sort of thing. And I think code that has really sped up that process. Part of the reason for that is that people are concerned about the ability to to acquire kov it through contact. And, you know, there’s lots of contact with coins and currency that encourage. And I think there are some people who say, well, you know what, I’d rather use my credit card in this situation. Also, there’s a lot there are a lot more people we know or ordering online.

And so, of course, there is no currency transaction in those situations. So I think that is a really big factor in what’s going on. Coin Cornin age and currency depends on the circulation of coins already in the marketplace. And then that’s augmented as a relatively small percentage of new coins and currency that then are injected into the market from the Bureau of Engraving, Graving and Printing. And the U.S. Mint to the Federal Reserve. And from there in two banks. So without the coins circulating, then that is created. I think that’s the major reason behind the shortage. But there are other reasons as well, I think.

OK. So if I can sum it up right now that the number one reason is the ecosystem was disrupted is what I’m think I’m hearing you saying. And that is. That’s exactly right. Yes. The logistics in the flow of currency has been knocked off kilter, so to speak.

Yes. And therefore, the pace and the flow of that prior to Kofod has been altered. So being someone who was thirty fifth director of the United States Mint, was this something you looked at? Meaning figuring out how much coinage to have in the system while also the system had its own coinage flow. Was there a formula that’s used at the Treasury or the Mint? How does it work? How do you judge the flow of currency and how do you keep everything stimulated so that there’s no blockage? It sounds like this is a blockage at the moment. How did you do prior to Kovik error when you were in charge of the world at the Mint? How did you handle that?

Well, we changed it when I was at the Met. Prior to me coming on board and sort of discovering this problem, the Federal Reserve Bank, the regional banks order coins from the United States, met based on their own economic models, and we just responded to those orders. And as a result, and the Federal Reserve, frankly, was not very good at projecting demand for quarters. Demand for quarters depends on how strong the economy is. Now, this is not the case with Gopin today. Cobh, it is a very different kind of experience that we’ve never had before. But in the boom and bust cycle, when the economy is really strong, there is greater demand for coins. And when the economy goes into recession, there is less demand for coins. And the Federal Reserve. When I got to the moon, was very poor in predicting what coin demand would be was very slow in responding to changes in the trend of the economy. We develop our own econometric models, which were much better than what the Federal Reserve had. And so we could anticipate changes and cut back or increase production based on our own projections. But like I say, Cobh, it is entirely different. If it were a typical kind of recession, then we would see demand for coins dropping and we wouldn’t have a shortage in the market. In fact, what we’d have is this vast oversupply sitting at the Federal Reserve and the US. But this is a completely different kind of recession is.

That supply and demand of coin.

Would that be a leading indicator of economic activity or a lagging indicator, the way the Federal Reserve was forecasting coin demand was a lagging indicator. And what we did was we looked ahead at the very earliest signs of a shift in the economy and we began to cut back as that develops. So we we did sort of make it a concurrent or even a little bit leading economic indicator, which kind of sees softness in the economy develop.

So as a financial guy, you saw me see the door open that you just gave me right there. And I jumped through the doorway to ask you, leading or lagging. And now you say it’s leading. But I think what you’re gonna tell me is I’m gonna twist your arm here and say, look, I know you said this covered things a lot different, but I guess we can’t use this shortage of coins as hopefulness that the future business cycles going to be very strong or it’s stronger than what’s anticipated. I think what you’re going to tell me right now is covered is the reason why money or coins are not in circulation. More people are not going out. More people might be sitting with that that jar they would take to the bank and get the coins counted and given to the bank and take dollars. I think you’re going to tell me that’s the primary reason why there’s a shortage, not a boom in the economy.

Yes, you nailed it. I think that’s exactly right. And because this is such a unique in the modern history of econometrics and coinage and currency, we’ve never seen anything like this.

So we had no guide for how this will transpire. And I think really what Colvert has done is cut the link between economic trends and demand for coinage.

And to a certain degree, it that Cobh, it has accelerated that separation that had been occurring over several decades. And we see this. I think the clearest indication of this is how much commerce has moved from brick and mortar companies to online transactions. And obviously, currency is has nothing to do with online. And and so I think we’re going to see a significant change and a decrease in demand on the currency as a result of.

So business owners who rely on more cash and paper and coin money flow, Cauvin may have accelerated the death of. Traditional currency, is it fair that we can maybe make a bold statement like that?

I wouldn’t say it’s the death. I mean, the death of coinage and currency has been predicted basically since credit cards and certainly since debit cards took off and greater number of electronic transactions. But there’s a very real appeal to currency because of the privacy element to currency. A transaction that depends on quantity and currency cannot be traced, whereas any kind of electronic transaction obviously can be traced unless you’re using Bitcoin or something. And of course, that’s a tiny fraction of any kind of economic transaction these days. So they’ll always be that appeal. And there’s also the current the convenience of just know pain with cash when you’re out.

Yeah, I guess people I’m finding cash gives people a sense of security in that, oh, my gosh, my debit card doesn’t work. At least I got a few bucks in my pocket that I can put some gas in the car. Do whatever you need to do. It’s interesting because if you look at the price of square, the multiples it’s trading at Square is that electronic device for those listening that might not be aware of it, where you can swipe a credit card. Small businesses find it very convenient because it plugs into a cell phone and you can do a transaction. Will that stock? It’s almost trading at multiples as crazy as Amazon was in its day before it was earning money. And everybody’s scratching their heads saying, oh, my gosh, how much more can this particular stock go? And I think, as you mentioned, there’s a direct correlation between covered a little bit of an acceleration and change in the way we do business as a society where electronics are going to be more involved. You said something interesting where you said there’s a privacy component to currency and and, you know, traditional money. And I want to play off that a little bit, not so much with what people are doing in their own day to day lives and why they want that privacy. But I want to talk about the lack of transparency that are coming out of the current mint as well as the Treasury, because nobody wants to come on and talk about it.

Share with us why there’s a lack of transparency right now from those that are serving on behalf of the U.S. citizens in positions in government to talk about this, but they don’t wanna talk about it.

Yes.

Well, I’m going to speculate a little bit based upon my own experience and my own experience at the Met. And I spent so much of my career in politics. I also speculate at that level.

From my experience at the United States Mint, when I got to the Met, your description was a perfect description of sort of the bunker mentality at the U.S. Mint. And what I discovered was that the information systems were so poor that nobody wanted to talk to anybody in the media because they were afraid that they’d be contradicted by information that the mint it issued somewhere else in some other format. And so the easiest thing to do was really not to give much information to keep their lips shut. And this was true across a very wide variety of issues and areas. One of the things we did, the United States Mint when I was there was greatly improve the information gathering and analysis capabilities at the Met. And there wasn’t a single press release, a press statement that didn’t go out that I hadn’t reviewed. And so we got much more transparent. During my time at the Mint, and it was easier to because we were fixing a lot of the things that our customers and that the public felt were broken at the U.S. Mint. Now, there may be an element of that because there’s tremendous uncertainty in the marketplace and because of the uncertainty about coinage, probably people are very cautious that you meant U.S. Mint in climbing out on a limb and giving you the kind of explanation that I’m willing to give you because I can’t be held accountable and nobody at the Treasury Department will call me and complain about whatever I say.

So I you know, I can give you my best account and without having any concern about being second guessed. I think there’s also. Again, I’m speculating, but I think there’s also a big political issue that is leading to the silence from the United States. And that is really no one at a political level in this administration wants to talk about it. This is I mean, anything you say is likely to get you in trouble at the highest political levels that the Treasury Department and at the White House.

So why climb out on that limb and and caught that kind of controversy? So I think, you know, informed speculation. I would say those are the two big factors.

Now, if if you were involved, let’s say you were still, you know, in a leadership position, what just kind of let’s put ourselves in the shoes of those leaders. What would what could somebody do? Do they do they try to increase production of coins? What would you do to get it into try to get coins in the system? Because I would imagine this is a drag and economic drag on business. Or maybe I’m wrong.

I think it’s an inconvenience and that doesn’t. When I say it’s an inconvenience for businesses and for banks, I’m not, you know, denigrating how important it is.

If it’s a can inconvenience, then, you know, businesses are going to call their members of Congress and members of Congress will be irritated and call people, the US Treasury Department or at the Mint.

And so, you know, there are squeaky wheels out there that aren’t getting greased. And that’s never a good thing. But I don’t think it’s probably interfering with economic. There are so many other huge obstacles to the economy getting back up and running today. That shortage of coinage is basically nothing compared to those other factors.

Philip Diehl is my guest. He is thirty fifth director of the United States Mint. Philip is also former chief of staff of the U.S. Treasury secretary and currently serves as president of U.S. Money Reserve. One of the nation’s largest distributors of U.S. government issued gold, silver and platinum coins. Philip, can we switch and talk gold a bit? Gold is is hitting record highs. Share with us on why gold is up right now.

Again, there are multiple factors. I think the biggest factor is that for several thousand years, gold has been the go to asset in times of economic and political crisis. You could always rely on gold at least holding its value during those kinds of periods of turmoil and typically going up in value and in more modern history over the last 30 or 40 years in every major political or economic dislocation in the United States or worldwide. Typically, because of globalization, if it’s happening in the US, it’s happening all over the world. In those times you go back and compare gold against every other major asset class. And gold beats their performance during that period of time.

And so I talk about gold as being wealth insurance and that, you know, in like insurance, little life insurance or home or auto insurance when an accident occurs or other bad news occurs. That’s why you hold that asset, that insurance. And so if you make gold part of your portfolio, then when the other assets are going down in those periods, gold is going up and protecting a portion of the value of your of your portfolio.

You know, my advice over the years has been, it’s OK for everybody. Have a piece of gold. Right? I own gold. I was more of a believer now. Tangible gold is OK, you know, to have some of that. But it’s difficult. It’s like coins, right? Currency. We’re talking about quarters, nickels and dimes. And business owners don’t want to touch it. It’s dirty. Got to get it around. He got a. But I was a paper gold fan. You know, the miners and those that are part of the infrastructure of creating the tangible gold. I paid a dividend yugi get in and out easy. Didn’t have to store it. But for those that are more conspiracy theorists who want the tangible gold because everything could shut down and you want to be able to have something physical. What’s your take on that physical versus paper? And then to take it a step further. What type of physical? I’ve talked about monster boxes in the past on this program. So great to share with our audience. You being a metals expert. Gold, silver, platinum coins.

First of all, you know, in the interest of full disclosure, my company sells physical gold. And so, you know, we don’t sell any form of paper gold. So with that is an understanding and full disclosure. I’ll give you my opinion about this. And before really before I joined this company, I look deeply into the patterns and the different value propositions of paper, gold versus physical gold.

Now, physical gold, as you were saying, is that if you need if you need physical it, you are in a crisis situation.

And it doesn’t have to be a situation like the end of the world or the preppers situation. You are expecting or you think it’s possible that there will be a huge dislocation, either political or economic, then physical gold. Is your go to asset when and this is one of the reasons why gold is physical. Gold is so popular in China and India and other developing nations, because it is it is security in crisis situations where they’ll always have that asset. And it might be, you know, economic dislocation. It might be a situation in which they need to flee the country and they can take that with them. And we have seen this happen across history in which people have faced huge crises and needed to leave. And gold was their ticket out of their country and out of their situation and that the men were to in multiple occasions. So that is part of the attraction of physical gold. Another part of it is that people don’t. And I think this is legitimate people. There are a lot of people who are not comfortable with paper gold assets like ETF apps.

When before I came into U.S. money reserve, I was very curious about ETF.

And at that time, one of the largest gold ETF s had their prospectus out. And I read through it and it sort of made my hair stand up because of all the caveats that were written into that perspective.

And and I I came out of that saying I’d never invest in gold ETF because of all those caveats in which and those caveats meaning, well, this goes wrong, this goes wrong or this goes wrong, then, you know, you’re out of luck. The you bear that risk. Now, in terms of the miners, there has been a pretty consistent pattern over the last 20 years, not universal, but pretty consistent that miners stocks have not performed as well as gold has. And part of the reason for that is that gold is getting harder to find and more expensive to mine. So the margin that the miners are getting, even as gold prices go up, is shrinking. And so if you put your play is is gold itself, then gold is a better return than the miners stocks are. There’s another element in this, too.

And one of the reasons why gold prices are going up is when you’re getting a good return like you would from a bond or a stock and the your willingness to incur risk is high, then, you know, gold is so attractive because you don’t get a return. You have a cost, relatively small cost of having it in a bank, safe deposit box. But today, returns are so low that that negates the cost and the lack of a return on gold and stocks. You may get a higher return, but you also incur a greater risk. And those of us who follow the market today understand that equity prices, bond prices are being propped up by Federal Reserve policy. Today, we would have seen a crash in the market if the Federal Reserve had not stopped it, stepped in and personally did see it crash. 30 percent drop the markets before the Federal Reserve stopped.

Gold versus silver versus platinum. Where would you be going now? And the reason I bring that up is we had another question from a listener saying, hey, I seem to be able to get more from silver. Now, there’s a conspiracy theory behind this. That is, if the system shut down and somebody needed to go buy something from someone else, that they would use some other form of trade ability. That’s what drives gold in time of crisis. You have something that you can go to that will have some value universally. Silver and platinum. Folan. Same category, I believe, although they’re not gold. So the question came. Should I be buying silver because I can get more silver? And therefore, if I need to trade this and use it to buy goods and services, that would be an easier way to do it. So share with us. Gold, silver, platinum. Where would you be building your tangible asset space in?

Well, one of the big differences between gold and other precious metals is that other precious precious metals like silver and platinum are used much more extensively in industrial applications and other commercial applications.

And as a result. Silver and platinum is more tied to economic cycles. So that is when the economy is strong. There’s greater demand for those products. And when the economy is weak, then demand drops off.

Whereas gold is much more insulated from that kind of rise and fall of commercial demand. And as a result, it more clearly reflects. Fear gripping the market, whether it’s geopolitical fear or economic fear. Gold is a bigger investment, just like any form of insurance is a protection against bad news, catastrophe or any other kind of fear inducing event.

So it depends on what your goals are. If your goal is financial security in bad times, then gold is the place to be.

What’s your formula for the right percentage of gold in a portfolio?

Well, I don’t have a formula.

I basically have factors that people need to weigh. One is risk of nervousness. Gold protects your overall portfolio value.

Another thing is your view of whether or not you’re optimistic or pessimistic about the mid to long term future of the economic future.

I mean, I can well see people who are really pessimistic not only about the immediate future, but for some years to come. And if you’re really a pessimist, then I think gold. That suggests that gold should be a larger part of your part of your portfolio. And for example, I have been a pessimist about the economic and political future of not just people in the United States, but in the world. Not not a lot of pessimism in the long term, but I have felt like we are headed trouble for the last five years, seven years.

So that’s one of the reasons why I’ve been an advocate for gold. But also, it depends on, you know, when you put your perspective is on when you’re going to retire.

I would you know, that would also be a factor in how I would play gold as part of a portfolio. And then the size of your portfolio. That’s that’s another factor as well.

If you’re looking to hedge some and, you know, to ride an economic boom or your expectation for one, then platinum or silver is a better play for you if. But absolutely. If what you’re looking for is a precious metal that you can use in commerce in bad times.

Well, obviously, because silver is a lot cheaper than gold, then it’s more it’s easier to imagine using that in any economic transactions.

The part of the problem with that is that you have to you have to have a in order for that to work, you have to have commercial entities that are able to transact. You’re in real time with real time silver prices. And that’s much more likely to happen in gold than as silver. In fact, if you go to Asia, commercial specially jewelry sellers know on the spot with the spot price of gold is and will conduct commercial activities in that way.

Yeah, it seems as if where we have credit card machines, they have scales. Yes, I think. Right. I know it. And in India, they’ll just take a bangle and they’ll take a link out of it. Ben, what I try to tell people who think that they might need to use gold at some point to transact their their day to day life living. You know, the challenge comes in using a one ounce coin. Would you doing a shave a little piece off of that? And I try to tell folks there’s right. There’s one. Yeah. Sleeves of one tenth of an ounce. And you get coins that are almost the size of a dime, 10 of them to equal an ounce. But people tend to shy away because there tends to be a little bit of a premium on that convenience.

Yes, that’s true. And but I think the real value of gold in times of economic crisis is not to go to the store and buy groceries. That’s not the value proposition. I think the value proposition is to have your wealth in a way that it’s immediately available and transportable.

And but you’re absolutely right. You can have a carry. That’s all American eagles, and, you know, it wouldn’t be very good in that situation.

And so actually, people worry the government’s going to come and confiscate gold again. And therefore, you know, how do you get through the metal detector and say, you know, not my gold. But anyway, that’s a different story for a different time. And it looks like it looks like I found a friend in Philip Diehl, who was thirty fifth director of the United States Mint. And Philip is also former chief of staff of the U.S. Treasury secretary and currently serves as president of U.S. Money Reserve. One of the nation’s largest distributor of U.S. government issued gold silver platinum coins. Philip, can you give us a way to reach the money reserve and those that might want to engage in gold, silver or platinum, a way in which they can be directed to your group?

Yes, on the Web. U.S. money reserved. Tom and I encourage them to go there and to become familiar with us, know the background of the company.

I never think it’s a good idea to just randomly go into the market on something like any kind of investment, much less precious metals and not really getting familiar with a company.

And one of the things I as director of the United States, man, I have a lot of opportunities. I ended up coming to U.S. money reserve because I thought there was real opportunities for me to contribute to the development of the company. And I had a deep commitment to customer service at the United States. Man, that was demonstrated in a lot of things that we did there. And I was very impressed with his company. And its like was its commitment to customer service.

It’s about what we’re about and that is education. And you’re recommending people educate themselves and get clarity. And then some guidance on how to navigate through. And for those that want to be in this space or add this to their overall mix of assets for their wealth. There’s always a place to go in. Why not go to a place where you can get an education and clarity with some guidance? So, Philip Diehl, thank you so much for being part of the Your Life Your Wealth podcast with me, Steve Cordasco. My pleasure. Thank you, Stuart. Take care. Thanks for being part of today’s program. As always, you can feel free, send me questions directly. Ask Steve at CNN Plan dot com. That’s Aske Steve at CNN as in Cordasco Financial Network Plan dot com.

Make it a great week. A safe week. Thanks for being part of today’s program. If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit Cordasco Financial Network at CNN Plan dot com or call our office at two one five five five eight. Thirty five hundred. We hope you’ll join us again next time on the your life. Your Wealth. Network.