Rare Coin Investment: An Alternative Approach
By Doug West, Ph.D.
If you are serious about investment in rare coins you have hopefully done your homework and read some of the books on the subject, such as, books by Q. David Bowers and Neil Berman. As you will see in these and other books on the subject the premise is rather straight forward, which is, buy high quality rare United States coins and wait for them to appreciate in price. I don't differ with the approach; buying and holding rare U.S. coins has proven to be a good investment over the years. Study after study has borne this out.
So why propose an alternative approach if this one is working so well? Just buy the books and coins and have a fantastic investment - well, maybe it isn't that easy. I want to briefly go into the short comings of this approach and propose an alternative approach that overcomes these difficulties.
Problem number 1: Truly rare coins are expensive. A $500.00 coin that is considered genuinely rare would be an inexpensive example. By rare, I am talking about coins that have a mintage of less than one million and the known surviving population is only a fraction of the mintage. An example of a truly rare coin recently sold in a Heritage coin auction was a 1921-D Mercury dime graded professionally by PCGS. The coin was in MS64 condition and had full split bands on the reverse. The closing price was $4,994.00. That by no means was the most expensive coin in the auction. Do you really want to jump into a game where the entry fee is high and you don't really understand all the nuances of the game?
Problem number 2: Expensive rare coins have low liquidity. They are not ill-liquid, meaning they can't be sold; it just takes a lot of time and effort to sell the rare coin and get the price you need for the coin. The expensive "high end" coin market is controlled by a few key players which makes the market inefficient. Speaking as a Professional Coin Dealer with decades of experience, I think twice about dropping $5,000.00 on a coin that may sit in my inventory for months or years until the right buyer comes along.
Now some details. The first obstacle to overcome is the high price of entrance into to the world of investing in rare coins. This is overcome by purchasing coins that have significant bullion (or precious metal) content and are not rare in the collectors sense but coins that have potential to appreciate for both their numismatic (collector) value and their precious metal content. Precious metals, such as, gold, silver, platinum, and palladium have consistently (over the long term) increased in value. Limited supplies of the precious metals and an increasing world demand have caused the prices to slowly creep up over the decades. The increase in the printing of paper money by the governments of the world has lead to price inflation for the precious metals. It is the classic case of an increasing supply of paper money chasing a limited supply of precious metals. In this article I want to briefly touch on some examples of the coins that fit into this plan and also some example of items that should be avoided.
An example of a group of coins that fits into this plan would be U.S. silver coins minted before 1945. The dimes, quarters, half dollars, and silver dollars from this era can be purchased near their melt value and offer the up-side potential due to their silver content and their collector appeal. A significant portion of these coins have been melted over the decades and only a fraction of the original mintage is available. This group of coins has potential to increase in price resulting from their bullion value and from an increase in demand as a collectable. On the other side of the equation are silver rounds or bars produced by private mints that are 999 fine in purity. They typically come in one, five, ten, and 100 Troy ounce sizes. The price of these bars moves up and down strictly with the price of silver bullion. There is no collector base for these items which doesn't offer a floor for the price of the bullion items. At any time, new and existing mints can rapidly increase production to meet the demand - this isn't the case for vintage U.S. silver coins. Strictly bullion items aren't part of the plan.
The second problem of low liquidity must also be overcome. The type of bullion related coins suggested in this plan are readily bought and sold all over the world at coin shops, coin shows, and on the internet. It is now possible (and rather easy) to sell your coins directly to other collectors and dealers via the internet such as eBay and Amazon. The internet has drastically improved the efficiency of the coin market and provides a new path to build a collection of valuable coins. With increased liquidity comes a lower fee structure. Now the coin market has been opened up and a few key individuals don't control the market. With more collectors and dealers available this leads to the possibility of shopping for bargains (and they do exist) and reduced fees for transactions.
This article is just a brief introduction to an alternative approach to coin investment and will require much more in the way of detail to become a viable method to systemically build wealth through coin investment. My plan is to write additional articles that flesh out the details of this approach - stay tuned!