U.S. loses half a cent on each new penny


What happens if a penny is worth more than 1 cent?

That's an issue the U.S. Mint could soon face if the price of metals keeps rising.

Already, it costs the mint well more than a cent to make a penny.

This week, the cost of the metals in a penny rose above 0.8 cents, more than twice their value last fall. Because the government spends at least another six-tenths of a cent - above and beyond the cost of the metal - to make each penny, it will lose nearly half a cent on each new one it mints.

The real problem could come if metals prices rise so high that it would be economical to melt down pennies for the other metals they contain.

Appearances aside, pennies no longer contain much copper. In the middle of 1982, after copper prices rose to record levels, the mint starting making pennies that consist mostly of zinc, with just a thin copper coating.

But these days, zinc is newly popular. Rising industrial demand and speculation have sent the price rocketing. Since the end of 2003, zinc prices have tripled. Gold, by contrast, is up only about 50 percent.

"What is really new in the commodity world is the extent to which hard commodities have been converted to financial assets through exchange-traded funds and hedge funds," said Ed Yardeni, the chief investment strategist of Oak Associates.

"In the late '90s," Yardeni added, "my hedge fund friends were all experts in technology. Now all they talk about is zinc, lead and oil. There is a lot of money that has poured into these areas."

And Yardeni thinks that run is not yet over.

Asked if the mint had a backup plan for what it will do if zinc prices rise far enough that it could pay to melt down pennies, a spokesman said that such issues were for Congress to decide. Perhaps the mint could go back to making steel pennies, as it did during World War II when copper was needed for the war effort.

Pennies, meanwhile, are in high demand, mainly because of sales taxes. Retailers demand pennies from their banks, the banks demand them from the Federal Reserve, and the Fed orders them from the mint. Many people who get pennies in change throw them into a jar, where they may sit for years, requiring the mint to make more and more of them.

And, at these prices, lose money on every one.

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