Jeff Clark, Senior Precious Metals Analyst
Collecting numismatic coins can be a fun hobby and can offer the collector a beautiful souvenir from interesting periods in history. But the term itself complicates things. A “numismatic coin” is a fancy term for a coin that is rare or valuable, with an external value exceeding that of the precious metals it contains.
As such, we hear the questions all the time: what about collector coins as a portfolio strategy? Are these 1933 gold coins a good investment? What should we be looking for when considering numismatism beyond the realm of a hobby?
Unfortunately, many novice investors that dabble in this market have lost money. And in many of those cases, the price of gold actually rose while the coins were held!
How can an investor lose money on valuable rare coins? And why don’t they rise with the gold price?
This article highlights three specific risks investors take with numismatics, i.e. collecting coins, medals and other rare currencies. Let’s cover them one by one, including some common dealer ploys that you should always watch out for.
The markup on numismatic coins is much higher than what you’ll pay for a standard bullion coin. Premiums can range from 25 percent to thousands of percent.
Premiums are higher for rare coins because they’re, well, rare. But that’s not the problem. The reasons most people overpay is because the value of a rare coin is largely subjective. The premium for a numismatic coin is based on rarity, condition, historical significance and demand. And different people value these aspects in different ways. Yes, there are annual publications that list prices, but those prices are often not what they actually sell for. And sometimes publications will list two (or more) different prices for the same coin!
This is why many investors have lost money in this area. The coins you buy could be relatively rare and in decent condition — but if they aren’t in great demand, their price won’t rise. This explains why some investors lose money on numismatics even when the gold price rises. And if you overpaid, it will take a substantial surge in demand before you can expect to make any kind of profit.
A bullion coin, on the other hand, like a gold Eagle, is based on the spot price of gold and not its rarity or demand. This means it has a tangible value that will remain consistent based on actual gold prices.
|Dealer Ploy: Bait and Switch. One reason investors get fleeced is because they fall for this common sales tactic. Here’s how it works… a gold dealer advertises an incredible deal on a bullion product… it attracts your attention… you call and they downplay the advertised bullion product and tout the “investment potential” and “bigger returns” of numismatics (like pre-1933 gold coins). These are higher-priced items and hand them a MUCH bigger commission.
Probably the worst culprits are the dealers you see on television. As someone who’s worked in the industry since 2001 and invested in gold most of my life, I can tell you that TV dealers have among the highest markups — they have to cover large advertising budgets and celebrity endorsements. Avoid these dealers!
I’ve read literally dozens of articles over the years about investors that grossly overpaid for numismatics. For example, Merit Gold and Silver was charged with a “nationwide fraud scheme that has bilked consumers out of tens of millions of dollars.” Check out what the prosecutor said:
“About 97% of the company's gross profits over four years came from coin sales, not bullion. So steep was the company's markup that even those who bought gold while prices were on the rise would be unable to recoup their purchase price. I never saw one client profit from their purchase.”
Unfortunately, there are many other instances of fraud in the numismatic industry. We’ve written about these gold and silver scams in the past, and you always need to be on the lookout when dealing with collector gold coins.
Beyond mark-up and subjective value, there’s one other giant reason you could easily overpay for a rare coin…
Buying a collectible gold coin allows you to hold history in your hands. That can hold some appeal.
But that doesn’t necessarily mean they’re a sound financial bet. Just like collecting baseball cards, comic books or artwork, if you’re not knowledgeable about the market, it’s hard to know if you’re making a good investment.
The U.S. Federal Trade Commission issued a consumer report in 2011 titled Investing in Collectible Coins that still is relevant today. Check out what they recommend every investor do first. In fact, it’s the very first paragraph in the report:
“If you're thinking about buying collectible coins as an investment, the Federal Trade Commission (FTC), the nation's consumer protection agency, has three words for you: research, research, research. In fact, the agency says, there isn't a potential investor around who can afford not to spend time researching the coins, the graders who assess them, and the dealers who sell them.”
If you’re willing to get educated about numismatics, it can be a fun hobby that also offers potential financial returns. If you’re unwilling to learn about the market, the experience of numerous other investors says you are highly vulnerable to losing money.
In fact, there’s a saying in the numismatic industry: “Buy the book before the coin.” In other words, do your research on any given coin before making a purchase. If you don’t do this, don’t expect to realize a profit.
Here’s another hint that rare gold coins are a risky investment: Current U.S. law prohibits ownership of collectibles in an IRA. If numismatic coins were considered a reasonably safe investment, they’d be permitted in retirement accounts. Numerous bullion coins, on the other hand, are acceptable for retirement accounts.
Keep in mind that the industry is primarily driven by collectors, not investors. This isn’t to say that investors don’t participate or that profits can’t be made, but the typical buyer is someone who wants a particular coin for his or her collection. If that doesn’t describe you, I recommend passing on rare coins.
|Dealer Ploy: Gold Confiscation! Another tactic of numismatic dealers is the confiscation scare. Here’s how it goes… President Roosevelt’s 1933 Executive Order 6102 prohibited the private ownership of gold in America, requiring US citizens to hand over their gold bullion to a Federal Reserve bank or face a $10,000 fine and/or 10 years imprisonment. The order listed two exemptions: “Gold coin and gold certificates in an amount not exceeding in the aggregate $100 belonging to any one person [about 5 ounces of gold at the time]; and gold coins having a recognized special value to collectors of rare and unusual coins.” So, the logic goes, buy some rare coins and you can avoid a future confiscation order!
However, this is misleading. First, a gold confiscation is unlikely today, since we’re not on a gold standard now like we were then. Second, even if there was a confiscation order, government officials may or may not provide the same exemptions. Further, in past confiscations the onus was on the investor to prove they were a coin collector and not a bullion buyer—if you didn’t own a substantial amount of rare coins, you were automatically deemed a bullion owner, not a collector.
There are better ways to avoid confiscation if you’re really worried about it.
To determine if you know enough, take this simple test: would you know if you’re being fleeced on the bid/offer price of a collectible coin? If not, I suggest you pass.
There’s one more risk to consider…
It isn’t that you can’t sell a rare coin. The issue is how much you’ll get for it. Just like you can get overcharged on the purchase, you can also get underpaid on the sale.
Because most investors overpay, the premium on a particular coin has to appreciate a great deal for you to earn any profit, let alone a big profit. If demand for your coins hasn’t appreciated, a collector won’t pay the price you’d hoped for.
You also have to find a willing buyer. Keep in mind that the rare coin market is tiny. This means you’ll have a very small pool of potential customers. With a bullion coin, like an American Gold Buffalo, you have literally millions of potential customers no matter where you live or travel.
|Dealer Ploy: Rare Coins Earn More! Some numismatic dealers will show you a chart of how much more rare coins rise in value than standard bullion coins. In certain circumstances they do. However, these statistics almost never reflect what investors pay when they buy and what they earn when they sell. Those charts exclude dealer commission and the extreme bid/ask spreads that always accompany these coins.
The way to combat this is to ask the dealer for the BID price of the product you are interested in. Hint that you actually own the product and are in the market to sell, and ask what you can get for it. This will give you a more transparent idea of what you’d really pay for that coin.
A few numismatic dealers will claim to have a guaranteed buyback policy. However, keep in mind that even if that policy is in writing, they could change their minds. They could also be forced to drop it due to market conditions, or keep the “guarantee” but offer you a buyback price that is far below what you paid or what other investors are getting.
Most investors should avoid the risks with numismatic coins and buy only bullion coins and bars. And the best way to do that is to shop at a dealer that only sells bullion.