 | 
|
| What you don't know about the Rare Coin Market can cost you
by Burnett Marus, RFC
This analysis of the evolution of the US rare coin market over the past quarter century is must reading for a first-time investor, and will also enlighten those who have been around the bourse a few times.
Introduction and preface [before 1972]
A quarter century is long enough to illustrate several boom and bust cycles and illustrate the behavior of a market in a variety of economic environments. Unfortunately, such long-term studies are comparatively rare in the world of numismatics. The primary reason is the difficulty of uniform pricing information. The definition of what constitutes a gem uncirculated (MS 65) coin differs markedly today from what it did even 15 years ago. Going back more than 25 years, evidence of the use of the numerical grading system (except for US Large Cents) is scarce. And if we go back more than 30 years, we find very little distinction between uncirculated coins at all. Superb gems might have commanded a small 10-20% premium, but today's focus on the quality of a particular uncirculated piece was simply not present.
First bull market [1972-1975]
While it is theoretically possible that coins graded MS 65 in 1974 (or at some other time in the past) could grade MS 65 according to current standards, no inference or guarantee of actual performance is intended.
Gold bullion fuels the market [1975-1978] The market paused for a while in the mid-1970s. There were few declines; the rate of increase simply slowed. In early 1975 the last restrictions on the American public's right to own bullion-related gold coins were lifted, and suddenly Krugerrands were the rage. The price of gold shot up from $100 to $200, and demand began to grow for US $20 gold coins (Saint-Gaudens and Liberties) as imports of these pieces from Europe began on a massive scale. A $10,000 investment in 4 sets of 10-piece common date MS 65 gold coins increased to $14,569 from 1975 to 1978. The rate of return was 13.36% per year for this period. The nation celebrated its bicentennial with special reverses on the quarter, half and dollar, and the general level of sophistication among collectors continued to grow. A new grade, MS 63, made its appearance, reflecting the increasing scrutiny and quality consciousness of the coin buying public. Some dealers questioned the need for such an "in-between" grade, as price spreads between MS 60 and MS 65 coins were still relatively small. Such would not be the case for long.
Debut of the rare coin "investment" market [1979-1980]
The market declines [1980-1982]
Phantom bull market [1983-1986]
The grading revolution [1986-1988]
As we mentioned earlier, coin grading by an independent third party already existed. The American Numismatic Association Certification Service (ANACS) and the International Numismatic Institute (INS) had been issuing certificates with a grading opinion for nearly ten years. But two crucial elements were lacking.
1) The coins were not sealed, so they still had to be examined by the prospective buyer prior to purchase, since deterioration could have occurred after the coin was graded. This eliminated the possibility of placing a "sight unseen" bid.
2) The bidding dealer could disagree with the grade assigned by ANACS. Nothing obligated the dealer to purchase the coin on which he was bidding.
The industry was beginning to show signs of orderliness, but the grading revolution had to survive two near fatal events: the much publicized attempted counterfeiting of PCGS holders and the investigation of PCGS by the Federal Trade Commission (FTC). The counterfeiting was foiled, new safeguards instituted, and the FTC found no major deficiencies. PCGS and NGC became the dominant grading services. For the first time, there was true liquidity in the market. New rules obligated dealers to purchase a minimum quantity of coins at their posted bids. Arbitrarily increasing bid levels now came at a price that many dealers were reluctant to pay. This resulted in a 2-year adjustment in bid levels for most coins, as market makers learned to cope with the new rules. By early 1988 minor modifications to the trading rules and an adequate supply of certified coins attracted the attention of several prominent Wall Street investment houses. The stage was set for the decade's second great bull market in coins.
The Wall Street Effect [1988-1990]
Wall Street's involvement in rare coins was looked on with great anticipation by coin dealers. For dealers, modest transactions with individual collectors and other dealers had been the norm. A "good" customer would spend $2500 to $5000 a year; "haggling" and returns were part of the deal. Now came fund managers with hundreds of thousands of dollars to invest in coins.
Long bear market [1990-1994]
From 1991 through 1994, the market fell steadily. While
certainly not the bloodbath of 1990, the declines were unremitting, and over the 4-year period, rare coin values halved again. Our gold coin portfolio, which had crested at around $566,000 in mid-1989, and had fallen to $235,000 by the end of 1990, slid to $126,468 by the end of 1994. All was not despair and gloom however. Coins continued to trade, and as they approached "bargain" levels, many collectors began to return to the market. MS 65 Morgan Dollars at around $100 looked a lot more appealing to collectors than they did at $350.
The market bottom [1995-1999]
Those of us who saw the "hot" market of 1988-1990 might characterize this sector as "warm." There is strong demand from wealthy investors who have made a bundle on the stock market, but every day become more nervous about their prospects for continuing profits from equities. In view of the economic environment over the past several years-flat bullion prices, low inflation levels and a red-hot stock market-the lackluster performance of the overall coin market is not surprising.
Over the past 25 years, the common date 10-piece gold set returned to its long-term investors approximately 13% per year. From 1975 to 1994, it significantly outperformed the S&P 500 Index; since 1995 and the continuation of the bull market in stocks, it has lagged behind. Obviously, much more could have been earned with "perfect" timing. Also, quite a bit could have been lost with poor timing.
Opportunities ahead in the [Year 2000 and beyond]
Starting in January 1999, the US Mint introduced the New Statehood Quarter Program, a 10-year celebration of the 50 States. A series of five quarter dollars with new reverses will be issued each year from 1999 through 2008, celebrating each of the states. (The coins will be issued in the sequence that the states became part of the United States of America.). This new program has brought great excitement to the industry with an influx of hundreds of thousands of new and younger collectors becoming interested in collecting coins. If just a portion of these new collectors become seriously interested in collecting rare coins....could a new rare coin boom cycle be far behind?
One thing is certain when it comes to the rare coin market, the only constant is change. Any move in the price of gold or in the inflation rate, or the long overdue correction in the stock market, or continued interest in the Statehood quarter program, could move the rare coin market in a big way. The market is a coiled spring. There is substantial potential for energetic growth. Looking at the trend from the mid-1970s, we see that the coin market is where it's supposed to be. We view the risk now as minimal. It does not appear that the rare coin market will be headed any lower, and given any external stimulus whatsoever, could easily make a strong upward move. Those patient investors with the wisdom to purchase near the bottom will be the ones who reap the reward at the top.
Burnett Marus, a Registered Financial Consultant, is Executive Vice President of U.S. Tangible Investment Corporation. He has been following the rare coin market for 26 years.
|
||||||||||||||||
|
©2000 Coin Connoisseur
5855 Topanga Canyon Blvd., Suite 330 Woodland Hills, CA 91367 Toll free: (888) 454-0444 ~ Fax: (818) 594-8599 email: info@coinmag.com | |||||||||||||||||
The rare coin market, like virtually all markets, has suffered no shortage of hype over the years. Many who have purchased in the past have done so with little understanding of the product or the arena in which it trades. This history of the rare coin market since 1972 is not all pretty, and we've pulled no punches. But we feel that investors, collectors, financial advisors, and dealers who want to serve them honestly will benefit. By understanding the history of the market, you can take advantage of today's tremendous opportunities in rare coins, while avoiding the errors of the past.
Further, the very core of the market has changed. From the late 1950s through the mid-1960s interest was focused on uncirculated examples of post-1934 issues traded in roll quantities. Silver dollars were still available from banks and ownership of gold was restricted prior to 1975, so one can appreciate why these bulwarks of today's market were virtually ignored by investors. Speculation in uncirculated rolls reached a peak during 1963-64, and then prices collapsed. Events movedrapidly from 1964 to the end of the decade. The coinage crisis of 1964-65, brought on by the conversion to clad (non-silver) coins, saw virtually all the dimes, quarters and halves dated prior to 1965 removed from circulation during the late 1960s. The government released the last silver dollars from its vaults in 1964 (with the exception of a few Carson City dollars sold at premiums in the early 1970s). The redemption of silver certificates (for silver coins) ended in 1968. With all these major events taking place, it's little wonder that truly rare coins took a distant back seat. It was not until the beginning of the 1970s that attention in the numismatic market returned to the rare coins which had been so unceremoniously ignored for the past 15 years. And it's here we begin our review.
Once circulating coinage ceased to be a viable source of material, the many new collectors who had joined the hobby during the 1960s turned to dealers to purchase their coins. Type coins, rare date and
territorial gold coins, patterns, colonials and commemorative coins were scrutinized and found to be vastly underpriced. Prices climbed steadily over the next three or four years. The increases were healthy and virtually "across the board." The Coin Dealer Newsletter (the industry's standard wholesale pricing reference), which had heretofore been a listing of BU roll prices, began to devote space to type and gold coins. Two columns in the "Uncirculated" category appeared, one for basic Uncirculated (MS 60) coins and the second for Choice/Gem Uncirculated (MS 65) coins. Price differences were slight, to be sure, but it signified the birth of a new generation of collector-one with a discriminating eye, interested in quality, not quantity.
The second energy crisis brought with it double-digit inflation, and bullion prices went through the roof. From Summer 1979 through early 1980, gold soared to $850 (from roughly $300), and silver rocketed to over $50 per ounce, a tenfold increase (due in part to the Hunt brothers' attempt to corner the silver market). The buying frenzy sweeping the oil and bullion markets spread to all tangible assets. Prices for rare coins and stamps virtually "added a zero" from mid-1979 to mid-1980. Some of the fuel for these increases stemmed from massive profits dealers had made in trading gold and silver bullion. During this period, stocks were out of favor. Business Week in 1982 trumpeted "The Death of Equities." Tangibles were so much the rage that a magazine debuted called The Collector-Investor. It extolled the profits in rare coins, stamps, art, rugs, wine, watches, furniture and anything else tangible and collectible. In the classic inflationary scenario, too much money chased too few goods. The evolution of numismatics into an area of investment can be identified with this period. Numismatics as a form of collecting art and studying history existed as early as ancient Rome; it was not until 1979 that the financial planning community began to transform the coin world. The price of the 4 sets of common date gold coins stood at $21,301 at the beginning of January 1979. By January 1980 it reached $66,348. The market peaked in January 1981 with the gold set now valued at $136,867. Such changes had never before been seen, or even imagined. Collectors who had patiently built sets during the 1960s and 1970s were rewarded with fabulous profits-if they sold. New England Rare Coin Galleries, a prominent Boston coin dealer, put together a rare coin fund of approximately $350,000 in early 1977 and sold it in March 1980 for over $2 million, earning the lucky investors a return of around 600% in only three years. As auction records from the period attest, such gains were not uncommon. Many coins bought during the mid 1970s for $400 or $500 were sold during this period in the $2,500-$3,000 range. It looked like you couldn't lose. There was a dark side. Fly-by-night numismatic investment companies sprouted like dandelions after a spring shower. The majority of the price increases had accrued to the higher-graded (MS 65) pieces, and virtually all of the promotional activity centered around these specimens. Unfortunately, to the untrained eye, little separated these coveted "gems" from pieces of lesser quality. But the boom of 1979-80 had widened the price spreads between grades from perhaps 50% or 100% to the 400%-600% range. Accurate grading became critical, but many of these "instant advisors" lacked the skill-or the desire-to distinguish the superior pieces. Third party grading was available from the American Numismatic Association Certification Service (ANACS) and the International Numismatic Institute (INS). Both services, however, provided only non-binding opinions, setting the stage for a major change in the coin industry four years later.
Although bullion prices had peaked in mid-January 1981, the rare coin market continued to rally for another three months. Dealers were still reaping their profits from the smelters, and the sheer exuberance which had intoxicated the market was difficult to shake. Reality knocked at the Central States Show, held April 17-19 in Lincoln, Nebraska. Tax time had arrived, and many dealers were facing hefty bills. Bullion prices, while still high, continued to fall and suddenly everyone was a seller. The fall became rapid and steep. Within two years, the market dropped by nearly two thirds, and lack of liquidity seemed to make matters worse. There were few buyers even at the lower prices. The gold type set fell from $136,867 to $94,109.
By 1983, the general economic recovery that was sweeping the nation had put discretionary funds in the hands of many baby boomers. With memories of the bullion panic still fresh, rare coins held considerable appeal. Silver dollars and gold coins, which had played second fiddle to type coins during the boom of 1979-80, were a particular focus, and bid prices rose substantially for the next three years. Common date silver dollars, which at the beginning of the period were worth around $100, were bid at over $800 by the end. Our gold coin set, having begun 1983 at just over $90,000, soared past its 1981 high and crested close to $220,000 in the fall of 1985. There was, however, a catch. In these years dealers graded the coins they sold. If the buyer (whether another dealer or a collector) agreed with the grade, and the price was fair, a sale was likely to take place. Dealers could place bids to buy coins at a specified grade. A transaction took place only if the bidding dealer accepted the proffered coins at the grade.
For example, a dealer might place a bid to buy MS 65 Morgan dollars at $350. He could be sent one hundred coins from a variety of sources. But he might buy only ten pieces of the hundred sent. Ninety could be "rejected" because he did not personally feel they were MS 65s. The following week, the dealer might raise his bid to $375. Again, one hundred coins might arrive, equal in overall quality to those sent the prior week. This time though, the dealer might purchase only five, having slightly raised his standard for a coin to qualify as MS 65. Wholesale "bid," however (as reported by the Coin Dealer Newsletter) would show a $25 increase. In reality, the bidding dealer was merely offering a little more for a slightly nicer coin. It appeared, though, that the value of every Morgan dollar ever graded MS 65 rose by $25. In essence, a dealer could make a self-fulfilling prophecy by promoting an issue, forecasting a price rise, then bidding on that issue himself to raise the price. Few, if any, coins needed to actually trade. The mere appearance of a bid moved the price sheets. Problems with this system had become obvious by late 1985. Many dealers and collectors were holding coins which, while accurately graded in the past, were no longer liquid at the current bid levels. "Gradeflation" had eroded their value relative to published bid prices. Most of the coins hadn't really fallen; they just weren't worth the huge prices listed in the sheets. An MS 65 Morgan dollar purchased for $125 in 1983 was worth perhaps $150 two years later, as an MS 63 or MS 64. Few were worth the $750 shown for an MS-65. Unrealizable paper profits were a bitter tonic for investors. In early 1986, the coin market ushered in the modern era with a huge reform.
In early 1986, the Professional Coin Grading Service (PCGS) began operations, followed the next year by the Numismatic Guaranty Corporation (NGC). These grading services differed from anything that had come before. They sealed coins in tamper-evident plastic holders, known throughout the industry as "slabs." It is impossible to open a slab without destroying it. Therefore dealers could place "sight-unseen" bids for PCGS and NGC certified coins, since they were now guaranteed to be in the same condition as they were when they left the grading service. Many dealers scoffed at PCGS and NGC, questioning the viability of a "standardized grading system." However, after a glimpse of market acceptance for PCGS and NGC, more grading services appeared. Into the fray, which already had ANACS, INS, PCGS, NGC, and NCI (Numismatic Certification Institute), came Hallmark, Compugrade, Photo-Certified Institute and others. All touted grading expertise and the "most conservative standards in the industry." At the same time the electronic bidding network evolved with the American Numismatic Exchange (ANE) providing instant transactions for dealers. ANE chose to report only PCGS coin prices, forcing dealers to subscribe to another service, the Certified Coin Exchange (CCE) to get other certified coin prices. ANE disappeared and CCE became the primary service.
In the competition for business, many coin dealers became "numismatic investment counselors" and virtually ignored the long-time small collector. The 1988 ANA Auction looked like a stockbrokers convention, with myriad blue suits, white shirts and power ties wandering the bourse floor. Numismatic Ventures Fund initiated a $15,000,000 fund; Kidder Peabody acquired $42,000,000 in their first offering; Shearson Lehman Hutton was in the headlines touting their intentions of marketing rare coins through their network of 11,000 brokers; Continental Investment Group funded $36,000,000, and Merrill Lynch entered with a $50,000,000 fund. This was supposedly only the first phase. There were constant rumors of other Wall Street firms entering the rare coin market. The massive influx of new funds had an intoxicating effect. Prices skyrocketed to previously unheard of levels in virtually all series, with coins graded MS 65 and higher enjoying the largest gains. Many watched in amazement as prices increased upwards of 10% per week, fueled by a seemingly endless supply of cash from "institutional buyers." The 4 set 10-piece gold portfolio soared to nearly $566,000 by June 1989, more than double its price of just a year before. Remember that 14 years earlier the bid price stood at only $10,000. The market took a breather in the fall of 1989, but as the new decade dawned, it appeared to be heading north again. Appearances were deceptive.
The advent of the Gulf War in August 1990 created a 500 point drop in the stock market over a 2-week period. Wall Street firms, finding their equities positions drastically lower, abruptly ended their commitments to rare coin funds. As a result, the 1990 ANA Sale was a disaster. Dealers awaiting millions from the funds and partnerships were left abandoned. From August through November 1990 the coin market was in free fall. Stunned dealers, many desperate for cash, dumped their coins onto a market filled with others in the same position. Other dealers held their inventories, certain that the declines would abate. When they didn't, these dealers discovered that the value of their coins had fallen by nearly 50%. Cash was king, and no one in the numismatic marketplace had it. By the end of 1990, the free fall had ended, but many of the major market makers had been crippled. Their liquidity was nil, and the market value of their inventories was, in most cases, well under their cost.