How an Investment in Rare Collectible Coins Offers Both Diversity and Profits
President, David Hall Numismatics Part 1: What Drives the Coin Investing Market
Part 1: What Drives the Coin Investing Market
It's a clear fact that the coin market moves in cycles. Both internal and external forces cause this cyclical behavior. Internal forces are constantly working within the rare coin investing market, so let's take a look at the ones that matter the most to investors.
Like all markets - stocks, commodities, currencies, commercial real estate and so on - the coin investing market reacts to the price-driven, internal forces of the supply/demand equation. People buy coins until prices get way too high, then they sell coins until prices get way too cheap. The market builds momentum going each way. The cycle repeats itself again and again.
|Classic coin investing piece:
1802 U.S. Large Cent
These price-driven internal supply/demand forces are very powerful. Because of these internal forces, coin investing can experience a bull market even in the absence of bullish external forces. And that's exactly what happened during the internally driven bull markets of 1960-64 and 1983-89. What's really exciting is when both internal and external forces combine to generate the 1976-80-style bull market.
There are four major external forces that can apply pressure to the prices of rare collectible coins. In order of importance, they are:
1. Government coinage policies and promotions
What our government does with coinage has a tremendous impact on people's desire and ability to collect coins. Examples include the government's resumption of yearly proof set manufacturing in 1950, after an eight-year hiatus. The yearly minting of proof sets beginning in 1950, and the improved packaging of those sets beginning in 1955, helped fuel the post-war coin boom and carried through to the 1960-64-bull market.
Government coinage policy can also have a negative impact, as was seen when it stopped making proof sets from 1965-67, stopped putting mint marks on coins from 1965-67, and, most importantly, when it took the silver out of coins in 1965. This action put a real damper on coin collecting and stopped the 1960-64-bull market.
Lately, the government has definitely been the coin market's friend. The statehood quarter program, beginning in 1999 and running through 2008, has literally brought hundreds of thousands of new collectors to the coin investing market. In addition, the government's resumption of commemorative coin production in 1982, and the improved marketing efforts of these coins in the 1990s, has given coin collecting a big boost. The government's recent coin production is a major reason we're now experiencing a renaissance in coin investments and collecting.
2. What Inflation Means for Your Coin Investment
I know this is a supposedly "dead" issue, but it's a major influence on the coin investment market. Inflation may allegedly be dead, but the fact is that the U.S. Dollar has lost 95% of its purchasing power since 1940, and rare coins are a superb inflation hedge. In the past, the rare collectible coin market has always done very well in periods of increasing inflation.
3. The stock market
Here's what we know about the coin investing market in relation to the stock market: Coins do well when the stock market does poorly. This was clearly evident in the 1970-74 and 1976-80 bull market. Coins can also do very well when the stock market does well, as was evident in the 1960-64 and 1983-89 bull markets. But coins don't necessarily do so well when the stock market soars, as was the case in 1990-2000.
|coin investing classic:|
Here's a story that may illustrate why....
I remember going to coin shows in 1999 and 2000 and seeing many dealers and collectors spending a good deal of their time on cell phones talking to their stock brokers about their stocks. But then, so was everyone else in the world.
4. Gold and silver prices
Since the government took the silver out of our coins in 1965, and Nixon closed the international gold "window" in 1971, the fluctuations in gold and silver prices have had a clear impact on the rare collectible coin market. Gold and silver bullion prices were a major factor in the 1970-74 and 1976-80 bull markets. Investing in coins can also bode well even without huge moves in gold and silver, as in the 1960-64 bull market and, to a certain extent, the 1983-89 bull market.
The rare collectible coin market's bottom-line is one of the best of all investments. In the previous sections I explained how external conditions affect the coin investing market, and how much you can expect to make investing in coins. Here are five more important advantages of rare collectible coin investments:
Rare coins are the most liquid of all collectibles. Since 1963, the Coin Dealer Newsletter has published weekly dealer-to-dealer pricing information for all of the important U.S. coins. No other collectible has a pricing structure published as frequently and accurately as rare coins. And, two or three times a month, there are major coin shows and/or auctions where you can sell your coins. What can you expect from the rare coin market in terms of liquidity? When the time comes to sell your coins, you can expect and receive immediate payment.
2. Diminishing Supply
This is a subtle yet very important coin investment advantage. The supply of rare coins is diminishing daily. Not only are they not making any more $20 Saint-Gaudens, Buffalo nickels, Walking Liberty halves, Morgan silver dollars, etc., but also the available supply is constantly diminishing due to meltings, abuse, neglect, etc. This is a sharp contrast to other investments. In the stock market, when they need more shares, they issue them.
The advantage of the rare coin market's diminishing supply is twofold. First, any increase in demand makes price increases inevitable. The supply of coins cannot be increased to meet the new demand. The only way new demand can be satisfied is with higher prices. Second, a limited supply reduces the downside risk. As prices come down, production gluts (as in the oil market) do not depress prices further and hinder a price recovery. In fact, in the rare coin investment market, low prices tend to drive coins off the market.
A painting can cost a million dollars or more. But rare collectible coins seldom cost more than $100,000. Top-of-the-line art, diamonds and real estate all demand very large amounts of money for the purchase of a single item. But most of the coin investments I recommend (and they are the cream of the crop) are in the $500-to-$10,000 price range. And you can buy some important, top-quality investment coins for as little as $100. So what can you expect from the rare collectible coin market in terms of affordability? You can expect to participate no matter what your coin investment budget is.
4. Favorable Tax Treatment
This is a seldom talked about (but significant) advantage offered by the rare collectible coin market. You do not have to pay taxes on your rare coin profits until you actually sell the coins. If you bought 20 MS65 S-mint silver dollars for $10 each in 1977, and still had them in 1985, they'd be worth more than $6,000. Your profit on that $200 is huge. So, how much tax do you owe? None! You haven't sold the coins yet. You could even take them to the bank and borrow $3,000 or more against them and deduct the interest expense from your tax liability! Put your money in a T-bill or CD and you have to pay yearly taxes on the interest.
All of us have different degrees of confidence (or should I say paranoia) about our government. I, personally, feel the government's intrusion into the private financial affairs of its citizens has become a major concern for all investors. Of special note: those of you investing in coins do not have to file any special government reports. Can you expect to remain anonymous as a rare collectible coin investor? Yes!
Originally published in A Mercenary's Guide to the Rare Coin Market. For more information on David Hall and David Hall Rare Coins, go to www.davidhall.com.
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