This month we discuss investing in numismatic coins, with a focus on gold and silver. Numismatics can be very good investments that preserve and grow wealth over time. However, many don’t know what to look out for when investing in rare coins. We discuss the main things to know and provide you some resources on how to get started on this very unique and lucrative investment.
Coin collectors buy special coins for various reasons. The first is because it is a serious hobby, and not only for older male Americans. Many younger people have begun to collect coins as well. According to the US Mint, over 100 million people collected the 50 states quarters during the early 2000s. Special collecting events such as this promote awareness of the value of rare and special coins to the public, and continue to increase interest in the hobby for many Americans of all ages and backgrounds.
Beyond the hobbyist level are serious professionals who store large amounts of their wealth into their coin collections. These collectors are very serious about their collections and spend a lot of time and money developing them over time. Coin collecting is a global phenomenon and occurs in every major society. According to Coin Week, coin collecting is a multi-billion dollar industry world wide. There are over 5000 operating coin companies in the US, with 10 companies exceeding sales of $100 million per year. Many wealthy individuals count their coin collections as a major part of their investment portfolio. A recent study noted that millionaires store 9.6% of their wealth in non-financial assets such as collectibles, including coins. The percentage of wealthy investors buying collectibles is also up 5% in the same study, out of which coins make up 2% of the gains. CNBC notes:
In fact, rare coins soared 248 percent in value over the past 10 years, according to the Luxury Investments Index, found in the Knight Frank 2013 Wealth Report.
In short, collectible coins are popular coins with a secondary market beyond the first sale from the mint. What makes coins collectible are their mint size (how many are created), their dates, their beauty and condition, and their availability. The combination of mint size and availability equates to rarity. Some rare coins are squirreled away in estate vaults to be transferred to future generations, and may never see the light of day. Further, coins can often be lost or hidden away in attics and basements only to be found years or decades later. Therefore, a coin can be more rare on the market at a given point in time than its total original minted quantity. Coins that are more rare are almost always more valuable.
Coins that have have limited issues are often priced much higher than the value of their metal, which is called intrinsic bullion value. Coins have three basic measures of value, which are:
Coins are graded by one of three companies in the US. Two of these companies are generally considered most reliable, and they are the first two listed. PCGS is probably the most popular among coin enthusiasts.
Grades are provided on a numeric scale from 1 – 70. Grades are provided at two tiers, circulated and uncirculated. Per Smarterhobby.com:
A coin that has been worn nearly smooth. On some coins, such as Buffalo nickels, the date may be obliterated completely. The coin may be identifiable only by type.
Much of the coin design’s basic outline may be visible, and parts of the inscription near the rim may be visible.
The coin’s overall design should be largely outlined, though areas near the rim may be worn smooth. Lettering near the edge of the coin might be partly worn into the rim.
Good-4 to 7
The coin’s date should be fully legible and the rims should be complete. The coin’s overall design should be fully outlined, though minor details will be obliterated.
Very Good-8 to 11
The coin will have completely defined rims and complete inscriptions and date. Some details in the design will be evident.
Fine-12 to 19
The coin’s overall design will be bold, with some details evident throughout. Lettering, the date, and the rim should be clearly defined.
Very Fine-20 to 39
The coin’s rim, lettering, and date should be sharp. More than two-thirds of the coin’s details should be visible.
Extremely Fine-40 to 49
Most of the coin’s details should be clear, and on better examples of an “Extremely Fine” coin, hints of mint luster may be evident in protected areas, such as around inscriptions, the date, and high-relief portions of the design.
About Uncirculated-50 to 59
Wear should be visible only on the highest points of the coin, such as Lincoln’s cheek and beard on the one-cent coin. Mint luster should be evident across much of the surface.
Mint State Coins
Mint State coins are graded on a numerical scale ranging from 60 through 70, with “60” denoting an uncirculated coin with bag marks, scratches, and other unsightly marks.
A Mint State-70 coin is fully struck, lustrous, and considered numismatically perfect, with no evident surface marks or other detractions visible under 5X magnification.
Proof coins are special coins made for collectors, and they are typically struck twice to sharpen the quality of their images. Proof is not a grade, but the way in which the mint makes the coins to appeal to certain investors. Proof coins are graded according to the grading scale above, and can be circulated by their owners. However, circulation of coins in public can significantly alter the original numismatic value of a proof coins. These coins are struck for memorial purposes or special occasions. They will often be struck with matte style surfaces and have the look of a circulated coin.
Commemorative coins are produced to preserve a specific historical or cultural event. Commemorative coins are not intended to circulate as money, but are considered legal tender by the issuer. They may be struck as proofs, business quality, or specimens and will be rated using the same criteria as other coins.
Error coins have some sort of defect and are often considered more value due to their rarity amongst the total minted coin set. Error coins can be categorized into the following:
Enthusiasts often collect types of coins into sets. An example nickel set may look like one of the following:
Type sets from certain eras, such as WWII, may include the following:
A year collection may focus on coins produced in a specific year, such as a year that has many coins of increased value or the year of the collector’s birth. Topical collecting includes thematic investments in coins of similar type or face value from different countries.
Collectors find coins in various ways, including at coin stores, estate sales, in old coin roles, using metal detectors, and at rummage sales. The most productive way to collect coins is through other collectors and dealers wanting to sell or trade their stocks.
Coin Clubs are also another way to find coins and to network with other coin collectors. An example of a national club is the American Numismatic Association. State clubs exist including Florida United Numismatists and Central States Numismatic Society. Many cities also have local coin clubs. Coin shows and conventions are also very popular.
One of the most important benefits to serious coin collectors include many factors, including privacy, tax deferral, wealth accumulation, and price stability. Collectible coins offer privacy over other investment types that can be tracked, such as traditional financial investments held by banks or brokers. Even real estate valuations are tracked by local government agencies, and are taxed yearly on whatever value the municipality wants to set in accordance with applicable state laws.
Collectible coins offer a steady way to store and grow wealth, which don’t fluctuate as wildly as stock, bond, and real estate values, at least in short and medium terms. PCGS tracks the value of a of 3000 popular rare coins and offers them in an index dating back to 1970. Investors will note that the coins held their value over time, and prices spiked up in the late 80s due to general economic conditions. These rare coins, however, don’t have a high beta, meaning their value does not rise and fall frequently. Further, rare coin values do not spike down during times of economic instability such as recessions. As such, collectible coins are often a great hedge against the price fluctuations found in more popularly traded paper financial instruments. This is mainly why wealthy investors collect them.
US Coin Values also tracks a smaller subset of 87 coins in an index dating back to January 2000. The index shows that rare coins appreciated steadily despite the major market crash during the Great Recession of 2008-2009. This index is up a 4.23 times multiple of the the 2000 prices, highlighting the value of highly sought-after US collectible coins over the last two decades. Not many other investments, outside of gold, can claim these kind of positive returns over the same time period. Stocks, bonds, and real estate returns all pale by comparison.