Rare United States American Coins vs Gold American Bullion Coins

Introduction

A few months ago I began purchasing gold bullion from a rare coin dealer. From the start, he advised me that gold in the form of rare coins was a superior investment, but I was wary about paying large premiums over the intrinsic metal value - for lack of knowledge about the market, and a fear that somewhere in those premiums, just beyond view of my experience, lay an outlandish markup.

At first, the simple acts of receiving, handling, carrying, and stacking the bullion provided an intense new rush. Opening up the safe just to rifle through the cache became a nightly compulsion. Sadly, as with most things, that initial excitement soon waned, and the simple act of acquisition and ownership lost its thrill.

I began to grow bored with the limited and rather unexciting options for physical gold bullion ownership. Bars, American Eagles and Krugerrands were joined by the occasional Panda or Kangaroo - a brief dally into U.S. commemoratives provided temporary respite from the tedium - but still, I yearned to recapture that first thrill of the buy.

The other day, soon after the novelty of acquiring gold bullion for the sake of acquiring gold bullion had worn off, I asked the same dealer to give me a pitch on why rare gold coins were a better investment than simple bullion coins.

He replied that gold bullion and rare gold coins, "are both on the same highway, they'll both get you where you want to go." Yet as investment vehicles, rare coins were akin to a Porsche - while the bullion was, perhaps, a Volkswagen (after performing the following research, I'm convinced that's an insult to Volkswagens everywhere).

I asked him to name, off the top of his head, a sample "starter kit" of rare coins - the sort of entry basket he might recommend to someone who had just freed up a decent sized portion of an investment portfolio and was looking to shift the funds into rare coins.

Rather quickly he threw out the following five coins and specified "MS-60" as the basic requirement:

  1. 1855 Charlotte Gold Dollar
  2. 1839 Charlotte $2.5 Quarter Eagle
  3. 1854 New Orleans $3 Gold Piece
  4. 1911 Denver $2.5 Quarter Eagle
  5. 1889 Carson City Silver Dollar


I asked him what the approximate return on those coins had been over something like the last 20 years in comparison to bullion. He didn't have the numbers, but was equally curious to find out. I determined to chart out the relative value of the coins in this starter basket vs. a comparable holding in bullion over the last 25 years, and he kindly made available his library of Red Book price guides from years gone by (Red Book, as I discovered, is a yearly published guide giving the prices of rare coins in all their various grades).

Up until that point, I hadn't really thought about historical returns on bullion, as I had only initially taken to buying it in light of extraordinary inflationary actions underway - with my intent focused entirely on future protection (and not growth per se).

I still maintain, for a whole host of reasons outside the scope of this report, a preference for bullion over dollar-denominated assets - but yet

I'm stunned by how well these rare coins have outperformed simple bullion coins over the last 25 years (and a bit chastened by the weak performance of bullion over that same span).

 

Methodology

As outlined above, the five coins constituting the sample "starter kit" were chosen without referencing their current or historical prices (actually, they were given to me over a cigarette in a parking lot - before any thought had been given to research). Since coins below the "MS" grade are less viable as investment coins, while coins in the high end of that grade are rather anomalous, I chose to standardize the basket to the MS-60 grade. By a stroke of luck, combining the 1983 Red Book values of the chosen coins in that grade gave a total of $19,750 - a number that has all the ring of a pre-determined investment allocation, and thus provided a touch of extra realism to the model.

The comparable investment in bullion was determined by simply dividing that $19,750 figure by the average gold bullion spot for that initial year ($424.35 for 1983), which yielded 46.54177... ounces. While a quick rounding to 46.5 (or more to the point, an even 50) ounces would have provided a more realistic entry, the magic of computers makes working with the more precise number just as simple, and so the exact number was kept to avoid the introduction of arbitrary decisions into the model.

Each of the last 25 years' Red Book values for the five coins was referenced and entered into a spreadsheet, along with that year's average spot bullion price.1  The value of the five coins was added to give a "Coin Basket" value for each year; while that year's bullion average was multiplied by 46.5(4177...), producing the total worth of the those holdings.

 

The Results

NumisVsBullion7_17597_image001.gif

Chart 1: Starting with $19,750 in 1983; the Coin Basket tracks the five coins chosen as a sample starter kit; Bullion tracks the total value of the roughly 46.5 original ounces.


...speak for themselves.

While there is much more to be gained from the spreadsheet than simply this chart, it makes the point abundantly clear:  rare coins have vastly outperformed bullion over the last twenty-five years.

As of the 2007 figures, the initial investment in rare coins has grown to a respectable $112,000. In that same time, the bullion holdings have only appreciated to $32,364 and change. That comes out to a 460% gain for rare coins, and an unimpressive 61.82% return on the bullion.

Clearly, when simply considering the relative performance of rare coins vs. bullion over the last quarter century - rare coins win hands down.

 

Diversification Across Coins

Table1.gif

Table 1: Data displaying each coins' individual performance.
All data on coin values taken from "The Red Book", see footnote 1.

One thing that stood out while entering the figures into Table 1 (above) is that some particular coins spent many years either in, or virtually in, lateral motion. The 1839 Charlotte $2.5 coin spent 1986-1990 stalled at $6,000. The 1889 Carson City silver dollar stayed in the $4,500-$6,750 range for nearly two decades (1983-2000) before suddenly going near-vertical to hit $25,000 in 2007. The 1911 Denver $2.5 coin is good evidence that this basket was picked without a look at the data - starting at $3,200 it stayed flat for a full two decades, and for most of the late 90's was actually showing a loss from the 1983 purchase price. It is finally showing strong movement, and by now has probably breached the $10,000 mark. 

Yet, as the first chart shows, by simply holding a basket of five well-selected coins one can capture a sense of the rare coin market at large.  The basket showed steady appreciation throughout, nominally losing value in only three years (by $250 and $50 in two of the three cases), and, for the most part, avoiding the sort of endless flat lines that can wreak psychological havoc on an investor.

Of course, this psychological threat against maintaining a long-term position would have been much worse yet for the bullion holder, who would have spent two large swathes of time during the last quarter century watching his investment drifting ever so slowly downwards.

 

They're Called 'Premiums' For a Reason

As relayed earlier, a large part of my initial resistance to entering rare coins came from a reluctance to pay premiums over the bullion value - which seemed to be determined with a much greater reliability and consistency than the value of coins. As I began learning about the certification companies that authenticate coins and then use a numerical system to assign their relative condition, as well as the ready availability of published price guides (such as the Red Book I've been mentioning) - most of those initial concerns proved unfounded.

More interestingly, by carrying these premiums, rare coins really are freed from tracking their underlying intrinsic bullion values. The simple act of setting a new price for them above, beyond, and regardless of their value in gold or silver, decouples them in a way that has proven most rewarding.

We can see from Table 2 (below) that the coins in our basket have traded anywhere from 49 to 1373 times their intrinsic values. More importantly from our perspective: the premiums, rather than holding steady, are in a long-term trend up and away from their underlying values. The recent surge in bullion prices has damped these percentages somewhat, but that only hints at there being a lot of space left for upward movement in these premiums before any record-breaking resistance might appear.

Table2.gif
Table 2: yearly coin values as a percentage of their intrinsic gold value; net weight in gold (ounces troy) given in row #1. 
All percentages rounded to the nearest hundred.

Global Demand and Portability

As relayed earlier, a large part of my initial resistance to entering rare coins came from a reluctance to pay premiums over the bullion value - which seemed to be determined with a much greater reliability and consistency than the value of coins. As I began learning about the certification companies that authenticate coins and then use a numerical system to assign their relative condition, as well as the ready availability of published price guides (such as the Red Book I've been mentioning) - most of those initial concerns proved unfounded.

We can see from Table 2 (above) that the coins in our basket have traded anywhere from 49 to 1373 times their intrinsic values. More importantly from our perspective: the premiums, rather than holding steady, are in a long-term trend up and away from their underlying values. The recent surge in bullion prices has damped these percentages somewhat, but that only hints at there being a lot of space left for upward movement in these premiums before any record-breaking resistance might appear. 

One item of interest brought up recently by gold bears has been the sudden and drastic reduction in demand for ornamental/investment gold in India.  The fear is that gold has finally reached a level where consumption in that (the world's largest) gold market will drop off.  Worse still are fears that the price is rapidly approaching levels that will bring everybody who owns a bit of gold out to sell, creating a glut of supply that will swamp the true demand for physical metal (futures markets, with their curious notion of supply and demand currently at some three times global gold reserves, notwithstanding).

The rare coin market, especially when discussing high-end, certified, investment-grade coins; counts amongst its many participants a strong showing by a different class of buyer - one who (however perversely) often thrives in economic downturns (we won't go there... promise).  Whereas the movement and storage of bullion in any serious quantity quickly becomes troublesome, rare coins can (always have, and presumably always will) float across borders with relative ease.

In the quantities under study here, it is not the weight but the simple volume of bullion that makes it incomparable to coins for portability.  To wit: I can think of one or two avenues for the discrete deposition of five rare coins that might prove... less comfortable in the case of 46 some ounces bullion.  The ability to hold the toils of a lifetime in the palm of one's hand has certain advantages were, God forbid, any future unpleasantness to unfold.  Should sudden flight prove prudent, best of luck with that two-ton safe.

 

Death and Taxes and Ever Less Privacy

The key to the extra financial privacy that rare coins offer vs. gold bullion lies in the legislated requirements on the dealer.  In the case of bullion all sales, regardless the size of the holding, length of the hold, profit or loss, or style of bullion - face a mandatory reporting requirement on the part of the dealer making the purchase.

In the case of collectible coins (those coins trading at greater than 50% premium to their intrinsic value), the reporting requirement falls entirely and solely on the person selling. While I would certainly never recommend anything but full compliance with all applicable laws, the privacy comes when you, yourself, get to report on your own activities - rather than having your affairs being reported on by another actor.

In the case of an Estate, the burden of delineating between ownership and mere possession proves other avenues of interest to taxation, but as always - consult with a professional for estate planning advice. 

Flashbacks to San Fransisco (circa 1879)

All those tedious pragmatics aside, there is one more reason I've discovered to prefer rare coins to simple bullion coins, and as far as I'm concerned it's the most important.  It's the reason I asked the question on returns in the first place.

Stacking countless copies of redundant coins soon leads to a phenomenon whereby, even though you are taking physical possession of the tangible metal, you can quickly summarize the activity with a number.  Be it a number of ounces or a number of kilograms, eventually the pleasure of your holdings reduces to a simply multiplier.  Find gold spot, multiply, end of story.

The night that I first laid the numbers out in table one, I became convinced that rare coins were, if not the only way to go, an important component of my future strategy.  The compulsion to involve myself grew so great that I hopped on eBay and started browsing around.  Till the midmorning my mind swarmed with dates, places, mysterious grades until emblazoned in my site everywhere I turned I saw after-images of lustrous gold coins and the gently faded faces of Liberty from that past.  Unable to resist, I went against my best senses and entered a bidding war on one 1879 $2.5 Quarter Eagle from the San Francisco mint.

I will never forget the vividness with which my mind crafted itself pseudo-historical scenes of San Francisco.  Bits and pieces of past impressions from movies, TV shows, and the encyclopedic research on the era I was furiously performing leading up to the last minutes of bidding came together to give me a near-immersive experience.  One hypothesized scene in particular, that of gold rush veterans and Chinese immigrants in a seedy gambling hall surrounding a table covered in coins precisely such as the one I was determined to win, will be with me a lifetime

The compulsion to obtain a piece of American history led me to a new appreciation for that same American history. In my journeys since, I've been delighted to find myself drawing the lines between the establishment of Western mints and the history of the eras and regions in which these coins were minted.  The seamless blending of a sound investment, a lifetime hobby, and the enrichment that any passionate pursuit of knowledge can offer has led to a sort of self-fulfillment far beyond any monetary value the may attach.

 

Concluding

In closing, I would point out that in that first eBay deal, for all that it acted as a pivotal moment of change in my life - I wound up ripping myself off.  Two blurry images of the coin, which in my starry-eyed naivety I took to present an un-graded specimen certain to grade into a profit, were hiding years of wear which - although they give the coin a certain charming personality that will keep it with me, I imagine, a lifetime - resulted in a poor investment.

As the above research shows - getting the advice of someone who has been in this business for at least those same 25 years can lead to a great investment, far outstripping bullion in performance, and with the numerous other advantages outlined.  I've since stuck to buying graded specimens through a trusted dealer, and it is a pleasure to recommend Andrew Gause of SDL Numismatics, who proved his sense of the market with the on-the-fly creation of the coin basket we've discussed.

If you are, as I was, tiring of bullion but timid about moving into coins; I would recommend giving him a call (1-800-468-2646).  You just may find yourself transported to a dust-filled room in Carson City; spotting a glimmer of gold in the mud of New Orleans; or sitting in a coach riding past the mother-of-them-all, the United States Mint in stately Philadelphia.

All the while, you'll be standing yourself in good stead against the onrushing vision of a dystopic new world order, crushing down to blot out what may prove to be, in the scheme of things, those brief few years of America's golden age...  ah, but I remember my promise.


1.  All coin value figures from "The Official Red Book: A Guide Book of United States Coins - R.S. Yeoman," editions 37 through 61. Since each year's guide is compiled using the data from the previous year (ie. the 2008 edition contains information culled from 2007 sales), the figures listed for any given year here would correspond with the Red Book from the next year (ie. the 1983 figures are taken from the "1984" Red Book).

All bullion figures are from Kitco, available at Kitco.com .