Rare Coin Investments 101 & Choosing A Dealer

Like other markets, the rare coin market has its ups and downs. The 1978-80 boom—similar to 2008—was a time of high bullion prices. The general public, driven by stock market uncertainty and inflationary fears, sought refuge in hard assets, including rare coins. Money managers and financial planners discovered the coin market. Rare coins became a suitable investment. Adding to the respectability of collecting and investing in rare coins, the government okayed rare coins for retirement accounts. Investors put retirement funds into rare coins at record levels. Coin grading slackened and dealers expanded the list of coins they were willing to buy.

As the market peaked, favorable daily media coverage kept up interest. But higher prices upon higher prices that fed the market ended—similar to the recent housing and real estate market. Knowledgeable collectors and investors were already out of the market. A year later the general public lost interest. Prices plunged.

Here is what happens at market peaks:
At the peak of the 1978-80 market, the general public packed coin shows and auctions. Still believing coins were underpriced; inexperienced buyers continued to pay ever higher prices. It was also a time of heavy dealer promotion. Television ads and numerous mass-mailings held forth enticing promises of quick wealth in the coin market. Rare coin gurus pointed the general public toward the land of promise. Rare coin and precious metal seminars abounded. Major seminars grew into annual or semiannual investment circuses.

"Getting-rich-beyond-your-wildest-dreams" newsletters proliferated. The 1978-80 boom, however, was over.

Here is what happens at market bottoms:
The gurus are gone, at least gone from the precious metals and rare coin market. The television ads and mailings are rarer than the rare coins they promote. Precious metals and rare coin dealers are no longer investment seminars’ main attraction.

Many coin dealers that flourished during a boom go out of business. Others move to smaller quarters. Coin grading tightens. The list of coins an individual dealer is willing to buy becomes smaller. The packed crowds at coin shows and auctions give away to smaller groups of collectors and onlookers. Bankers, stockbrokers, and money managers no longer consider precious metals or rare coins a viable investment. And the daily news is no longer interested.

Coin Prices
Like stocks, supply and demand determine price, however, for rare coins condition also determines price. But coin grading suffers from inconsistency. Individual dealers will favor one coin over another of the same grade, simply because he knows it will sell better. Both the market maker in over-the-counter stocks and the coin dealer take a financial risk. The coin dealer often owns the commodity being offered; buying at one price and hoping to sell at a higher price. Unlike the market maker in stocks, the coin dealer is not limited in the amount of commission ( mark up) charged. In the rare coin or precious metals bullion market it may vary—5 to 20 percent depending on the risk the dealer must take. In an up market the spread (what the dealer will buy or sell a coin for) narrows. With increasing prices the dealer's risk decreases. The more popular the coin the less the risk. In a down market the spread widens. With more sellers than buyers the dealer's risk increases.

What should I buy? First, there are no bargains. Comparison shop. Buy what you like. Buy rarity. Buy quality. Buy diversification. Buy long-term performance. Buy a coin priced for liquidity. Be willing to pay a fair price for a properly graded coin. Be patient. This is a long term investment.

"If you don't know your coin know your dealer"

I don't know who first said it, but it is excellent advice. More than likely you will deal with more than one dealer. There are some dealers whose market knowledge is limited. You will need to locate a reliable adviser or dealer. Find a well informed full-time professional with market knowledge—particularly when investing in rare coins. The dealer's location or size of operation is of less importance than his or her reputation and experience—two qualities that only come with time.

Your advisor-dealer should be involved personally and financially in the market. The rare or bullion coin market, like other markets, has its ups and downs. No one buys at the very bottom and sells at the very top. The wise coin investor will be rewarded with an investment to enjoy during the years and profit from as well.

The rare coin market wholesale spread—the difference the dealer may pay or be paid by another dealer— may vary 5 to 20 percent. It depends on the market and the risk the dealer must take. A dishonorable dealer may mark up the retail price another 100 to 200 percent, or whatever he or she can get away with. So know your dealer. A reputable dealer, and most are, adds enough to cover expenses and still be competitive, and hopefully make a profit.

Buy and sell on a cash and carry basis when possible. Don't let a coin or a bullion dealer talk you into storing your coins or bullion—unless the storage facilities’s goods are insured. Too many dealer doors have closed, leaving the investor without money, goods, or recourse. So let me say again: "Know your dealer."

Here are two preliminary questions you can ask when first meeting a potential advisor-dealer:
"Can I make a lot of money quickly?" If he or she answers in the affirmative, put your hand over your wallet and back away as quickly as possible. "I have $30,000 to invest. What percentage should I put into rare coins?" The answer is somewhat subjective, somewhere between 5 to 15 percent. If the answer is more than that, proceed with caution.

To get your business, some dealers offer a buyback guarantee. You will not need a buyback guarantee if you bought your coins from a reputable dealer and the coins properly graded and fairly priced. Besides, it may not be possible in a down market, no matter how well intentioned the dealer might be. If everyone is selling, the dealer may not have funds for buying.

Remember, be patient. And once again keep in mind Proverbs 21:5: "Steady plodding brings prosperity: hasty speculation brings poverty."

____________ Michael E.Odell

For Other Posts by Michael E.Odell —Click on "Blog Archive" at upper right
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