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Economics 101: The Business End of Your Rare Coin Collection

In my 30+ years in the rare coin industry, I’m often asked the same questions by coin enthusiasts just beginning their journey into the fascinating world of numismatics. Yes, I know I said fascinating; for if you love the origins of something tangible or history or just love money, there is many a tall tale to be told around some coins. Understanding how some coins become valuable and why some do not is simply a question of Economics 101: The Law of Supply and Demand. In other markets, such as food and energy, demand is relatively constant, and therefore price changes are driven mainly by the quantity of available supply. If supply is plentiful, producers will drop the price to drive sales. Conversely, if supply is scarce, producers raise prices to insure the ability to obtain new supplies. What makes gold and silver different is that supply is limited compared with most other elements. If demand increases beyond supply capabilities, prices will rise because producing additional supply is much more difficult and time consuming than it is for most other products. Eventually, prices increase sufficiently to discourage demand, and encourage the creation of more supply, either from production or from people selling gold and silver back into the market (often taking profit on the price increase) causing the price to drop until supply and demand are equalized. Price is the measure and the regulator of the balance between supply and demand. In the case of a rare coin, what you see is what you can get. Supply is limited, so prices are driven by demand. So whether you need one more coin for a collection or love the story behind a particular coin, do your economics homework and pick a coin that has a future in the marketplace.

Rare Coins and the Economy

In September, I gave myself the gift of a vacation, and spent about two weeks without reading email, looking at television news or reading the newspapers.  While this was mainly very relaxing, it had the added benefit of enabling me to return with a fresh and open mind when it came to analyzing recent developments.

My conclusion after this break is that the path our country is taking from a standpoint of monetary policy has not changed and likely will not change, regardless of the results of the presidential election.  Should Obama win, increased federal spending and increased federal debt coupled with almost certain economic stagnation will require more money printing, which is inflationary.  Should Romney win, the likely increase in economic activity will turn recessionary price deflation into price inflation, which, coupled with already strong monetary inflation will send inflation soaring.  For even under a Romney administration, the debt will increase as will money printing.  Like it or not, the Federal Government is heading toward a debt of $20 Trillion.

In other words, inflation is in our future.

The one big change while I was on vacation was QE3, or Quantitative Easing, where the Fed has committed to $40 Billion per month to buy mortgage securities.  While this amounts to as much as half a Trillion dollars a year, the amount of money was perhaps not as significant as the fact that that Fed tied its new bailout not to inflation, but rather to employment. 

The impact on precious metals was obvious and immediate: an increase of about five per cent in the prices of gold and silver.  Few individuals are selling their precious metals.  In fact, the vast majority of purchases I have made have come from people with a monetary need, or from more elderly individuals whose personal needs now make it fortuitous to sell.  In contrast, more people are adding to their accumulations, indicating a continued upside to the metals.   Expect this to continue. 

Demand in rare coins also continues steady, with collectors actively looking for those tough to find key dates.  Expect this to continue as more and more people begin to understand the implications of current economic policy and conditions.  Furthermore, while many collectors are finding the coins they desire, many are not, indicating we may soon start to see shortages in supply.

While for collectors I strongly recommend the purchase now of better date and high grade type coins, key date silver dollars, and stalwart collectables like the Fugio Cent (that’s the one with the best motto ever put on a coin:  “Mind Your Business.”) my strongest recommendation now is to buy $20 gold coins.

Here’s why:  almost every $20 gold coin now has one of the lowest numismatic premiums compared to gold in history.   That applies to all grades, from jewelry grade up to MS-64 for $20 Liberties, and MS-66’s for $20 St. Gaudens.  Not only is the spread small when compared to the price of gold, it is also small when compared to other grades.  For example, at this time, the price spread between MS-60 and MS-64 $20 Liberties is less than $500.   That is one reason I so strongly recommend $20 Liberties in MS-64 – they give you a much enhanced upside potential with very little additional cost.

The same is true for better date MS-63 $20 Liberties and MS-66 $20 St. Gaudens, along with all rare date $20’s, especially from the Carson City and New Orleans mints. 

Even lower grade $20 gold coins are so close to the price of gold, they represent a terrific way to get some numismatic potential with very little premium above the actual gold value – a possible boon to those who are mainly bullion buyers, but want to make a foray into the numismatic arena. 

With $20 gold coins, it becomes very easy to adjust your gold bullion content and numismatic potential.   The higher the grade, the more numismatic upside potential.  Additionally, the higher the grade, the more value these coins should retain should gold prices move in the opposite direction.  Some people select a variety of grades for added diversification.

We have ample supplies of $20 gold coins in all grades – at least for now.  Call me if you have any questions.

Now is also a great time to consider trading massive low end accumulations not needed by your portfolio for their gold or silver content for these much harder to find coins.

On a personal note, the Rare Coin Report Newsletter, which normally comes out in September will come out sometime around the middle of October.  Part of the reason for this delay was my vacation, but I was also waiting for some very exciting news, and it now appears I will be able to share that in the October Rare Coin Report, so look to your mail box.

Also, expect to see the “Rare Coins and the Economy” column published in the CNP blog on a monthly basis, as it appears that as time goes on, the economic picture will even more strongly affect the opportunities we expect will continue to materialize in the rare coins and precious metals market.

As always, if you are unsure of what move might be the best for you, whether you are interested in buying or selling, always feel free to call me.  That being said, we are now strong buyers of all coins, so if has come time for you to sell, please call.  I’ll make you an offer you won’t want to refuse.

Putting Precious Metals into your Individual Retirement Account.

    Stock market losses, uncertainty about the future and dissatisfaction with government policy have driven thousands to use this vehicle for hard asset preservation.

    This has been possible since 1986, but is just now really gaining widespread popularity. There are however serious limits and requirements to putting precious metals in your IRA.

• First, the kinds of metals you can put into an IRA are strictly limited, including gold, silver and platinum, but only using certain types of bullion bars or coins. Numismatic and PCGS/NGC certified bullion coins are not permitted for IRAs.

• Second, only self-directed IRA’s are eligible to contain precious metals. You must also have a qualified administrator and storage facility, as well as a dealer (like Customized Numismatic Portfolios) connected with certified storage facilities and qualified Administrators so that the entire process will be seamless. Each transfer is transacted according to all legal requirements, from the time you make the commitment to put precious metals into your IRA, all the way to having those metals sitting in your name at a certified storage facility.

    There is one exception to this.  If you have a self-directed 401K and you are the trustee, you can physically hold the precious metals.  Be sure to check the legal details of your IRA before you withdraw funds, as a mistake in this area could lead to potentially serious tax penalties.

    If done correctly, initial and annual costs can be minimal. 

Lawrence D. Goldberg's Tip of the Week:

"A one kilo bar, 32.15 oz. of gold (about $30,000 value) is one of the most cost effective forms of gold to put into an IRA"

Two Kinds of Inflation Impact Coin Market

   

It is no secret that inflation results in higher prices for gold and rare coins.  Massive inflation will result in massively higher prices.

    Last Rare Coin Report (January 2009, and viewable at www.CNPcoins.com) I recommended  5-10% of assets in gold and rare coins.  I now recommend 10-20%.  The reason is simple: inflation may not now show statistically, but it is here, will likely become much worse, and might start showing in statistics any time now.

    In a nutshell, it is because there are two types of inflation: “Monetary” and “Price.”

    “Monetary” inflation refers to changes in the number of dollars in the money supply. When government prints “fiat” money (dollars not backed by gold or silver) the money supply increases, and the value of each dollar drops.  This has occurred since the founding of the Federal Reserve in 1913 and continues to this day.  “Monetary” inflation is worsening.  Some sources claim more than Ten Trillion Dollars has been pumped into the money supply within the last year, with more on the way, as government tries to shore up undercapitalized banks struggling under the weight of toxic assets.

    “Price” inflation refers to the actual price of goods. Thus, if demand for gasoline increases, and oil supply remains constant, gas prices will rise.  That is “price” inflation. The problem with inflation statistics is that they only reflect price inflation, which is now actually price deflation because the recession reduced demand for goods and services, and prices on so many items have been lowered.  An interesting exception to this is the COLA (cost of living increase) for Social Security which went up 5.8%, but overall, prices on the full basket of goods, which include automobiles, houses, rent, and so forth is actually lower.

    This condition is unsustainable.

    Basic economics says trillions in new dollars pushed into the economy through massive Federal spending and borrowing will result in increasing demand for goods and services.  Adding to this will be more manufacturing and sales as inventories are depleted, and consumers replace and repair broken and consumed items and supplies.
   
    This makes price inflation virtually certain, triggering corresponding increases in hard asset prices. But there is more. The US savings rate is near 6% - a record. Over $8 Trillion sit in savings in the US.  As inflation worsens, expect an ever increasing flow of dollars into hard assets.  Already this year, we saw how even small increases in demand sent prices of coins dramatically upward.  If such demand becomes inflation triggered (which I believe it will), expect precious metals and coin prices to erupt explosively from current levels, sending values to record highs.   This is why coins and precious metals have retained and increased value, and why they are poised for an astronomical price increase over the next few years.

    The Fed traditionally fights inflation by raising interest rates.  To do so now could double already huge interest on the $12 Trillion and growing National Debt, which promises to increase under increased Federal borrowing and pressure from unfunded Federal Government liabilities like Social Security and Medicare. Nor can the Fed reduce money supply without undermining the liquidity of banks already staggered under tens of trillions in toxic credit default contracts, derivatives, consumer credit card debt and the still unresolved mortgage crisis.

     Price inflation could start tomorrow, or in a few months, but it will start soon. Once triggered,  events could move rapidly, which is why it is far better to buy a couple months early than even a day too late. It won’t get as bad as Germany’s Weimar Republic, or in today’s  Zimbabwe, where printing of dollars has topped the ridiculous with a $100 Trillion dollar bank note, but it will get bad.  Possibly very bad.

    And in this time of “hope and change,” probably the best policy is to make sure that you are protected.  What do you have in hard assets now?  How are you protecting yourself and your family from what could well be the most serious bout of inflation since the creation of the Federal Reserve in 1913? 

Note:  $10 Trillion Zimbabwe bank note…retail value about $8 US.